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Is Blockchain the Right Tool to Fix a Broken Competitive Retail Electricity Market?

by added on 7 May 2018, Comments Off on Is Blockchain the Right Tool to Fix a Broken Competitive Retail Electricity Market? , posted in Squared, Blockchain in Energy,

If you think competitive retail electricity markets provide value to residential consumers in the U.S, it’s worth taking a closer look. It’s a disaster.

The Massachusetts Attorney General’s office just took a look itself. Here are just a few highlights from the report, Are Residential Consumers Benefiting From Electric Supply Competition?

  • Massachusetts consumers in the competitive supply market paid $176.8 million more than if they had bought electricity from the power company during the two-year period from July 2015 to June 2017.
  • On average, throughout the year, 88 percent of households participating in the competitive supply market lost money, and 90 percent of low-income households participating in the competitive supply market lost money.
  • The gap between the average basic service rate and the average competitive supply rate increased by 72 percent.
  • Every municipality in the state experienced, on average, a net consumer loss in the competitive supply market in June of 2017.
  • And, worst of all, residents in communities with low median incomes, a high percentage of minority households and limited English proficiency, paid higher rates to competitive suppliers

It’s hard to imagine a market, once opened up to competition, performing this poorly. And this isn’t an isolated case of a state’s mismanagement of a new market, or a badly designed restructuring.

Across the country, states have experimented with retail choice and faced similar outcomes, leading some to eliminate or severely restrict competitive supply for the residential market. (Check out this thread from an attorney at the Natural Resources Defense Council for his personal experience.)

The report also reveals how competitive suppliers have targeted low-income communities and have been consistently engaging in bad business practices. Some policy and consumer protection ideas are laid out, but the report’s primary recommendation is “that legislators in Massachusetts consider eliminating the electric supply market for individual residential consumers.”

Ouch.

For those of us following blockchain in the energy market, this brings up a number of important questions: Is this an ideal market to disrupt? Or will it be susceptible to the bad business practices that the current retail choice landscape is experiencing?

The majority of current blockchain startups are developing “transactive energy” applications. Within that set, many are targeting the residential consumer with the opportunity to either reduce energy bills through more direct access to wholesale markets and/or further monetize their investments in distributed generation and battery storage via peer-to-peer energy trading with neighbors. There is no way to enter these markets today as anything but a competitive supplier, so the fate of restructuring will play a hand in the fates of blockchain startups.

Today, there are a handful of blockchain startups directly addressing the retail electricity marketplace with a solution that aims to differentiate from typical energy service companies (ESCOs) or retail utilities by leveraging their technology platform to lower costs.

The idea that costs associated with typical retailers — customer acquisition, administration, billing, customer service and risk management — can be lowered simply by incorporating a distributed ledger into the mix is yet unproven. Many of these new providers also plan a road map that adds the ability to support peer-to-peer energy trading through the creation of a local energy marketplace, where consumers can also be compensated as producers of energy (if they have solar on the roof, for example) or through other demand management activities.

These are exciting ideas. For many blockchain companies the ability to expand the value of distributed energy resources is key to their mission. But they’re stepping into a market that many would like to see regulated out of existence.

In Texas, where blockchain company Grid+ is planning to operate as a retail utility, some in the ratepayer advocate community are concerned. According to a recent article on the website Energy Choice Matters, the Texas Ratepayers' Organization to Save Energy and Texas Legal Services Center raised objections to the Grid+ application because it required customers to transact in cryptocurrencies and prepay their accounts in order to reduce the costs associated with credit risk of customers.

Grid+ says it will operate within the rules of Texas, but the conversation already exposes a significant disconnect between a business plan used to raise money and the reality of the market they intend to enter.

The Grid+ white paper offers the following value propositions that set its retail electricity business apart from traditional ones: 

  • Using the blockchain to manage and automate energy transactions to lower costs associated with payment processing.
  • Eliminating costs associated with bad debt by requiring customers to join the network through a deposit that can be drawn down if they fail to pay on time. (This is highly controversial and also highly regulated, so this won’t fly in many markets.)
  • Decreasing customer acquisition costs over time. (It’s not clear how — other than the hope of lower turnover because of customer satisfaction.) 

Is this enough to get Grid+ off the ground? Does it make sense to enter the market as a competitive supplier when most states find they offer no real value to consumers, and more likely are a net negative in the market? 

Drift, an energy retailer in New York City, is facing that reality today. It offers customers the potential for lower prices or access to more renewable energy options via what is termed a “distributed energy aggregation platform.” This platform uses artificial intelligence and machine learning algorithms to do some very clever price discovery and arbitrage in the New York market, and pass the savings along to customers. Drift didn’t launch as a blockchain company, but it plans to migrate over to Ethereum to take advantage of the technology for decentralized trading and settlement.

So far, the New York Public Service Commission isn’t entirely convinced. The PSC hasn’t allowed ESCOs to sell to low-income customers since July 2016, after finding that those customers had not benefited from competitive power and gas services. More recently, Drift applied to serve the low-income market, but was denied by the NY PSC because it was “unable to demonstrate how it would guarantee...savings to low-income customers.”

It’s not shut out of the whole market, only the low-income customer base. It’s worth noting here that one ESCO that was approved to serve the low-income market did so by guaranteeing a 1 percent savings against the utility price. Does that sound like a competitive market at work?

Drift’s response lays out some sound recommendations, including adopting supplier-consolidated billing, clarifying the rules and definitions around renewable resource initiatives, and treating distributed energy resource aggregators and ESCOs equally.

The complaints and failures of the competitive supply are undoubtedly more concentrated in the residential space, where buyers are less savvy and the ability to provide guaranteed savings seems nearly impossible. In the commercial/industrial market contracts are naturally larger, buyers more skillful in their negotiations and suppliers are held more accountable.

A few blockchain startups are heading in that direction, including the latest move from LO3 in Texas with Direct Energy to provide “micro-energy hedging” to large customers via the Exergy blockchain. It’s a creative use of blockchain’s ability to support secure data exchange among different players in a network, as well as to offer trading and settlements in smaller increments than typically offered.

Another blockchain startup, CleanEnergyBlockchain, is using the PowerLedger blockchain to serve commercial, industrial and public sector customers exclusively with what they’re dubbing a “blockchain PPA.”  As with all current blockchain implementations in energy, these are all very limited first trials, pilots or first customers. It’s far too early to tell if they can demonstrably lower costs over the alternatives, but in most cases they look to provide more than cost savings. In the residential market the promise is nearly always cost savings, and thus far they rarely — if ever — deliver.

So how does this all play out for blockchain in energy startups?

On one side, there are consumers who are quite engaged with their energy usage and have shown interest in paying a premium for renewable energy and participating in demand response programs and even local energy trading if available.

Yet, on the other side of the equation, are U.S. regulators who are understandably skeptical that retail choice has done anything of value. In most states, it has done real damage to consumers through abusive marketing and deceptive business practices. If you look at the recommendations of those in the policy community who are looking to fix this market, there's little here that blockchain technology uniquely addresses:

  • Prohibit contracts that lock customers into variable rates
  • Prohibit automatic re-enrollment
  • Limit cancellation fees
  • Prohibit deceptive and aggressive marketing, with aggressive enforcement
  • Let consumers opt out of marketing (or opt into marketing instead)
  • Limit the ability of energy supply companies to sell to low-income customers
  • Provide more complete information to consumers before signing the contract
  • Public reporting of actual prices paid, compared with utility prices
  • Public reporting of consumer complaints 

The U.S. retail choice market has to be fixed first before blockchain startups stand much of a chance of moving in. Afterward, regulators will be asked to set rules for peer-to-peer energy trading in exchanges operated by purportedly better actors than the current crop of ESCOs.

The promise of these blockchain startups is admittedly transformational — real-time energy markets that clear from the bottom up, recognizing the locational, temporal and environmental attributes of all sources of generation and load while providing a digital, decentralized means of trading and settlement.  A regulator could learn to love it, if the current providers hadn’t given this market such a terrible reputation.

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