Why the Energy Sector Meets the Conditions for Decentralization

The following piece on decentralizing the energy sector was written by Richard Lohwasser, who holds a PhD in energy economics and is the CEO of Lition. He was previously a strategy consultant for McKinsey and director of Vattenfall. Lohwasser was also Managing Director of German Operations at ExtraEnergie.

Decentralization. Digital autonomy. Circumventing corporate strangleholds on information. A new, democratized internet. The blockchain revolution has inspired a wave of ideological fervor around technological advancement that is unprecedented in the mild-mannered, minimalist world of the Silicon Valley tech giants. Crypto gurus, emboldened by new-found fortunes, decry centralized data systems, and herald an internet of no gods, no masters.

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The Democratization of an Industry

It makes sense. When Facebook is listening to your conversations and tailoring ad content accordingly, and Equifax is losing credit card and social security numbers by the millions, burning the old house to the ground seems like a plausible solution.

Blockchain startups left and right have latched onto this ethos of disruption, vowing to fundamentally redefine established industries from the bottom up. The purveying sentiment seems to be “Decentralize everything.” While breaking the grip of old guard institutions is a great rallying cry, there are a few important question to ask before trying to democratize an industry.

Asking the Right Questions About Decentralization

Why was the industry centralized in the first place?

Industries like banking originally centralized to bring stability, security, and ease of use to consumers. While cryptocurrencies offer their own benefits, such as anonymous, worldwide transfers, fluctuating value, hackability, and over-saturation could prove that monetary decentralization isn’t the perfect application for blockchain, especially in regards to widespread adoption.

Would decentralization improve the industry?

Decentralization is only valuable when there is a network of participants to decentralize to. If there is a single service provider or a passive user base, decentralization can make the system unnecessarily inefficient. Diverse networks with intermediaries that do not add value or security are best suited to decentralization.

Do people care enough to participate?

The average person doesn’t want to micromanage every aspect of their digital footprint. Decentralization inherently encourages user participation. If users don’t care about interacting, the system must either have some level of automation or might be best left centralized.

In the frenzy to decentralize via blockchain, many industries are introducing unnecessary systems than will only complicate service delivery. However, the modern energy market is primed for decentralization.

Historically, energy was provided by massive corporations, who were the only ones with the capital to build the infrastructure required to generate power. Dirty coal and natural gas plants were often the only energy available. In this system, decentralization would be unnecessary, if not completely illogical. However, times have changed.

A Decentralized Network for A Decentralizing Ecosystem

Energy production has diversified. Your neighbors may have installed solar panels on their homes. A local biofuel plant might be opening a few miles down the road. A wind farm may be churning away just off the coast. Energy is getting greener and renewables are the future.

Unfortunately, large utility companies, heavily invested in dirty energy, hold monopolies on power systems, which in turn holds the entire energy ecosystem back. Green producers are forced to sell through the utility companies as intermediaries. This barrier between producers and consumers drives up costs and stifles the growth of renewables.

Decentralization would allow for energy producers and consumers to circumvent intermediaries to buy and sell directly, mitigating the current problems. Peer to peer trading could increase producers’ profits by 30 percent and save consumers more than 20 percent on their energy bills. In this situation, decentralization is imperative for both the economy and the environment.

Higher profits would incentivize producers to participate in a decentralized network, but why would the average consumer care? The answer is twofold.

The more agency a consumer has to feel like they are making a difference in the world, the more likely they are to partake in a sustainable behavior, like shoppers consciously purchasing fresh, local, farm-to-table foods in exchange for peace of mind that the produce did not use harmful chemicals and supports local farmers. The same concept is applicable to energy. Directly displaying energy sources allows consumers to decide what option best fits their budget and world view.

If actively sourcing green energy entails more involvement than a consumer wants, AI interpreting data sets can handle automated buying strategies, sourcing cheap, renewable energy without user input, helping the planet and their wallet with little to no effort on their part.

Power to the People?

In the rush to decentralize everything via blockchain, taking a step back to ask why an industry needs to be decentralized is a crucial process that many companies and investors are currently ignoring. Understanding why a network is centralized is paramount in answering the question: Should it be decentralized?

The energy sector is one that passes the decentralization test with flying colors. Current centralization is the product of outdated monopolies, holding back the growth of renewables.

Directly connecting producers and consumers is the key to fostering the growth of renewables and saving money across the board. User participation is encouraged, but not necessary for the network to thrive, as the producers are the primary active users driving the system. Decentralizing the energy sector is a logical and tangible way to protect the planet and introduce the energy ecosystem of tomorrow.

What do you think about decentralizing the energy sector? Will it help break the monopoly some companies hold over the sector?

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