The Restart Energy ICO sold out yesterday morning, a mere 20 minutes after it opened its main sale. The
project has achieved its $30 million hard cap and has become the latest in a long line of blockchain-based, P2P energy start-ups to grab the headlines.
P2P energy has all the hall-marks of a revolutionary new approach to energy management, and Restart has emerged as one of the early movers seeking to set out its stall as the head of that movement.
On the other hand, the business models for P2P energy providers are still a source of confusion for many. How does P2P energy work in general? How is it profitable? Can it be profitable? And why does it seem to have suddenly become the next big thing?
Understanding the Problem with Traditional Energy
One very common misconception about P2P energy models is that it allows energy producers in one country to sell energy to energy consumers in another without any need to physically connect the two parties.
There is an assumption that blockchain magic or something technically weird and wonderful is taking place on the backend to allow the delivery of energy when no tangible delivery mechanism exists.
That isn’t the case – far from it. In reality, to understand P2P energy trading, you need to start with an understanding with the problems of traditional energy supply.
The Drawbacks of the Traditional Model
Currently, energy production and supply is generally managed by governments through a centralised, national grid system. This has done its job – very well, by and large – but it has some drawbacks.
There have been relatively recent technological developments that allow individuals and small enterprises to generate their own electricity with minimal technical know-how and at minimal expense. Furthermore, these generally come from renewable sources such as solar and wind.
These small energy producers occasionally create an excess of energy that their own localised systems are unable to store. So what do you do with this energy? One possibility is to hook up these micro-energy producers to the main grid and allow them to get paid for doing so.
There are two problems with this approach. The first is that national grid suppliers find these small contributors to the grid very cumbersome to work with. Small suppliers contribute their energy excess in volumes that are varying, unpredictable, sometimes unreliable and – above all – difficult to measure accurately.
As a result, national grids are rarely keen to integrate smaller players as an integral part of the larger eco-system and, consequently, this gets reflected in the price that these smallers players are paid when they do contribute.
There is, then, a need for a better way of doing things.
Solution One – Green Energy Certification
One solution to all of this has been for governments to create what is known as a Green Energy Certification system. This is a fairly popular approach – which takes slightly different forms in different countries – but it generally involves governments saying to renewable energy producers something like the following:
“If you can promise to produce X output in energy for the national grid, we will issue you with a paper certificate to represent every 1 MWH (Megawatt Hour) that you contribute and which you can sell on the market because its purchase will result in a reward of some kind for the buyer.”
The producers of this green energy then sell these certificates to specialised exchanges.
Businesses – and it is generally businesses – purchase these certificates in exchange for tax deductions or some other form of government subsidy – and thus demonstrate to statutory authorities that they are participating in and helping to encourage a green energy economy.
In practice these businesses are still fetching their energy from the national grid like everyone else – and therefore much of the electricity that is actually consumed is likely to be non-green in origin.
Nonetheless, these kinds of programs do encourage the creation and growth of a green energy sector – albeit
not quite as much as people were perhaps hoping for.
The problem has been that that anyone looking to participate in this economy needs to be able to build a sizeable operation that can meet the large energy demands set down by government directives which are often determined by the prerogatives of national grid infrastructure.
The other problem is that applying for and achieving Green Energy Certificate status is, apparently, something of a legal and administrative obstacle course. That complaint appears to be a common one, regardless of jurisdiction.
As it happens, this is the WePower proposition. They are a Lithuanian outfit seeking to create a platform which deals, amongst other things, with the legal and admin aspects of the jurisdictions in which they have a presence.
Local producers of energy simply have to sign up to the corresponding regional/national arm of WePower which will then integrate this small-scale electricity producer into WePower’s pre-existing, certified partnership within the same jurisdiction.
The producer gets near-immediate access to a ready-made energy consumption market and avoids the administration involved with striking out on their own – something that they may not have even been able to do in the first place.
In return, the local producer will hand over a percentage of its energy output to WePower which then pegs this energy to its native token – and purchasers of the token who live within the same jurisdiction covered by a WePower partner can thus get access to energy at below standard market rates (or so it is hoped).
This, by the way, is not a full description of the WePower business model, simply one part of it – and we discuss it here simply to outline one possible manifestation of a blockchain-based energy model.
Solution Two – Aggregating Localised Energy Suppliers
There is a second solution to the problem outlined described earlier. Imagine you have a neighbourhood. And let’s say within that neighbourhood you have some neighbours who produce their own energy from wind sources, and you have others producing energy from solar, and perhaps even one adventurous neighbour with the technical savvy to rig up a geo-thermal operation in the back garden.
This is all a bit hypothetical but helps to illustrate the example. The point is that we have a bunch of local, small-scale energy producers who each produce volumes of energy in what is generally an un-coordinated and unpredictable manner.
At any one time, some of the producers are able to produce energy and others not. Wouldn’t it be nice, then, if these local producers could somehow aggregate their energy in such a way that they could take advantage of each other’s excess production when they are unable to satisfy their own energy needs.
This all implies the need for a localised infrastructure – a kind of neighbourhood micro-grid, and this is where a proposition like Restart Energy comes in. Restart are seeking to promote an energy production model whereby a local entrepreneur undertakes to build the necessary infrastructure of the kind we would like our neighbourhood above to have.
This aggregated excess is then re-distributed back to those households that require access to that excess energy when they are unable to provide for themselves. And there is no reason that other local households who do not run their own energy production operations cannot participate.
They will simply pay for the energy – from the local aggregator of local energy suppliers as opposed to paying for energy from the national grid as they have been doing up until now.
What you now have is a business model that encourages localised green energy production. This, of course, presupposes that the national government in place allows for this kind of model. Some governments have regulatory frameworks which do not permit this or simply make it a bureaucratic nightmare to go down this road.
Others have a regulatory framework which is more receptive to this model, or have at least indicated that
they are happy to take things in this direction.
Restart, however, goes one step further by proposing a franchise model – actually, two of them. In the first franchise model, our local entrepreneur puts up all initial capital himself to erect the local energy aggregation unit but enlists as a Restart franchisee.
As a franchisee, he or she will benefit from Restart’s technical expertise as well as their brand. The entrepreneur takes the lion’s share of the profits and Restart get a nice commission, as will Restart token holders somewhere along the way.
Under the second franchise model, it is Restart who put up all of the capital with the local entrepreneur taking a smaller share of the profits, acting essentially as project manager / enabler for getting the local micro-grid up and running.
Where Does the Blockchain Fit in?
None of our discussion so far has in any way broached the subject of how or why a blockchain-based token model applies, and what makes it – at least in theory – a good fit for these P2P models. The answer is two-fold: firstly, there is the fact that the blockchain itself is P2P by its very nature.
Secondly, and just as importantly, the blockchain carries an inherent ability to offer up incentives. Blockchains are now becoming synonymous with tokens – and tokens are now basically being leveraged to create what are essentially product-specific currencies.
That in a conceptual nutshell explains the blockchain’s aptness for a P2P energy model. To understand the specifics, it helps to drill down to the business model itself of the blockchain start-up in question. And that is another example of why a reading of the white-paper is essential when you come across one of these propositions.
That said, we have generally found that white-papers are quite poor at explaining the underlying token mechanics (or the project itself, for that matter).
It may help to go through a couple of examples. We’ll come back to WePower and Restart, two blockchain P2P energy model projects that have been grabbing the headlines – along with Power Ledger, of course. Strictly speaking, it should be noted that WePower is not a P2P model – it is more of an aggregator of energy, but given that it sustains an energy production model which sees individual energy producers ultimately delivering to house-holds, we’ll allow the P2P description here.
None of what follows is to imply a comprehensive overview of token value for the aforementioned projects. What we are trying to do here is simply understand how the P2P business model can bring in the kinds of incentives to stimulate localised, green energy-sourced energy production on a mass scale.
That should give us some flavour of how blockchain-based P2P energy distribution models work in general – at least in theory. For the practice side of things, on the other hand, naturally only time will tell.
WePower Token Value
The WPR token derives potential value from the forward-looking assumption of the establishment of a large network of partners and the creation of significant energy infrastructure.
Partners will pay to WePower a percentage of their energy production (0.9%). WePower will then endow each token with a share of the aggregated sum of energy production that WePower owns.
The WePower proposition, then, depends on its ability to deliver a token price which, being a virtualised representation of a volume of energy, endows the owner of the token with the right to access energy at a price below the general market value. In theory, the more partnerships WePower signs, the more energy that is attributed to each token which, it is hoped, will result in allocation of electricity to each token that will allow WePower to offer electricity at below-market prices.
Restart Energy Token Value
With Restart, the token dynamic is structured differently. The model is driven by franchises, not directly related to energy production per se – although energy production still underlines the whole proposition, of course.
Put in its simplest terms: those seeking to set up a Restart Energy franchise will need to purchase some of the project’s native token – 10k tokens for a local city franchise, 10m tokens for an exclusive, national franchise with other hues of franchises on offer in-between.
In other words, the token mechanics are driven by – at least in part – a demand on the token coming from a growing network of entrepreneurs needing to acquire that token for their franchises. As Restart’s energy distribution model gains in popularity – i.e. as the number of franchises grows, so will the demand placed on the token. The end result, it is hoped, is growth in the token’s value.
The overall take-away here is that P2P models are really about putting in place incentive mechanisms that encourage participation in a network which is itself a conglomerate of clusters of mini-networks.
For anyone who has some familiarity with the tokenised economic model that most blockchain start-ups are proposing these days, this actually carries some sense; P2P energy model makes for what appears to be a blockchain fit.
Of course, the proof will be in the pudding, and we will need to wait a few years from now to see how these various P2P energy economies fair. But most analysts see a change coming. The question is likely not whether P2P models for the energy industry will become the norm, but which P2P models will become the norm.