Research Summary: Managing Climate Change With Blockchains and Oracles - Tecnalia/Chainlink Labs Report

TL/DR

  • Blockchain has the potential to be an important tool for supporting a transparent and effective clean energy infrastructure.
  • Oracles bring off-chain data (such as energy data) on-chain, perform secure off-chain computation, and allow communication across blockchains.
  • Because oracles connect existing energy industries to blockchains, they are essential for the creation of blockchain-based markets for sustainable energy investment and administration.
  • Blockchains and oracles offer sustainable energy industries a road forward, allowing them to upgrade their infrastructure while also meeting ambitious clean energy goals.
  • This report provides a good summary of the role that blockchain and oracles will play in the future of clean energy.

Core Research Question

What role do blockchain and oracles play in sustainable energy systems?

Citation

Chainlink/Tecnalia Report: Managing Climate Change in the Energy Industry With Blockchains and Oracles: Redefining the Energy Industry With Blockchains and Oracles | Chainlink.

Overview

There are a number of major changes in the energy industry driving a shift toward sustainable energy solutions. These changes include economic and political drivers.

Economic changes are related to supply and demand for sustainable energy. On the demand side, population growth and rising living standards increase the need for more efficient, cleaner energy systems. On the supply side, technological innovations in sustainable energy are growing at an exponential rate. One of these innovations are the advent of P2P decentralized energy systems, that make energy exchange powered by blockchain possible. Political changes are related to changes in political circumstances such as election results, war, regulatory changes, etc.

Decentralized Energy Grids

There are two major producers of energy at the moment: (1) independent power producers - large sustainable energy sources which include hydroelectric dams, solar panel fields, and wind farms and; (2) distributed energy resources - small scale energy consumers and producers (called “prosumers”) which include individuals, small businesses, and microgrids.


Figure 1: Distributed energy system models.

New electricity market designs are being considered for the “prosumer era” which focuses on sustainable energy exchange and production by smaller-scale prosumers (Fig. 1). Each of these models has the potential to be powered by hybrid smart contracts and blockchain.

These models include P2P(peer-to-peer) energy exchange systems; prosumer-to-microgrid systems in which prosumers exchange energy through a microgrid connected to a traditional grid; prosumer-to-island microgrid models in which prosumers buy and sell energy to an independent microgrid; prosumer groups in which prosumers create their own “power plants” by pooling energy resources.

Hybrid Smart Contracts and Decentralized Energy Grids

Hybrid smart contracts consist of a smart contract and a decentralized oracle network. Smart contracts automatically execute transactions if certain conditions are met and decentralized oracle networks supply the data for smart contracts. Together, these can power a multiplicity of use cases related to distributed energy system models. While the report mentions a total of eight sustainable energy use cases for hybrid smart contracts, I describe two in detail which are more directly related to distributed energy systems:

  1. Parametric insurance for renewable energy infrastructure.
  2. Consumer rewards for sustainable consumption.

Parametric Insurance for Renewable Energy Infrastructure

Parametric insurance is a special type of insurance that offers payouts on the basis of specific trigger events. Since renewable energy sources have a great deal of upfront costs and are subject to fluctuations in weather patterns that can seriously reduce energy output, parametric insurance that can be delivered frequently and instantaneously can reduce uncertainty and encourage investment. In this case, oracles play a key role in gathering weather data which is used to trigger parametric insurance payouts via a blockchain.

Some parametric insurance platforms have already been established in this area. For example, Arbol is an Ethereum-based platform that delivers parametric insurance on the basis of temperature variations.

Consumer Rewards for Sustainable Consumption

Rewarding sustainable behavior is essential for the long-term success of sustainable energy systems. Hybrid smart contracts can help reduce energy consumption through the use of data from smart meters that can be fed into smart contracts that are triggered when a certain amount of energy savings is reached.

Other Use Cases for Hybrid Smart Contracts

Other use cases for hybrid smart contracts include:

  • Tokenized carbon credits.
  • DeFi energy derivatives markets.
  • On-chain climate and green bond ratings.
  • Tokenized cash flows from clean energy projects, energy conversion contracts and grid management.

All of these are described in more detail in the Report.

Ongoing Challenges

There are a number of challenges that need to be addressed to maximize the success of hybrid smart contract use cases. Among these are the availability of high-quality data and open-source analytics, industry standards, and the identification of optimal regulatory and legal environments for implementing and piloting these use cases.

Discussion and Key Takeaways

This report provides a good summary for the educated layperson about cutting-edge developments in sustainable energy and the role that hybrid smart contracts will play in the future of sustainable energy.

While many of the use cases described in this report are very important, recent developments in the literature surrounding smart contracts in energy systems show that these efforts are even more advanced than this report may suggest. See some of my previous SCRF posts on these topics such as:

Of all of the challenges faced, I believe that finding the correct regulatory and legal environment to successfully pilot projects may be among the most important to address. Since developing countries have fewer energy regulations and a less developed energy infrastructure, these may be the perfect places to pilot many of these systems which can benefit the developing nation and can go far to help sustainable energy systems powered by smart contracts.

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Excellent summary, @jasonanastas! I wonder how this decentralised energy system is different from the EU’s new carbon tax payment system in terms of the efficiency of resolving the carbon emission problem?

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