In March 2018, the blockchain-in-energy hype dial turned up a notch with the publication of the total investment attracted by energy-related blockchain startups. While the numbers are impressive, it’s important to remember the majority is investment capital, primarily sourced from initial coin offerings (ICOs), not utilities’ direct investment into blockchain, which remains a tiny percentage. That will only come if these startups last more than a few years, and that ‘if’ is a rather large one.
How Big of a Deal Is Blockchain?
That energy-related blockchain startups raised $324 million in the last year is an eye-catching headline, and cause for excitement. Yes, blockchain is making an impressive charge well beyond its birthplace in cryptocurrencies. Yes, there is promise for blockchain in the utility industry, in several different use cases. Yet, caution, not unfettered enthusiasm, is advised.
Of this $324 million, 75% came from ICOs, a largely unregulated method for startups to raise investment in exchange for cryptocurrencies. ICOs are often backed-up with only a white paper (rather than a prospectus written by lawyers) created by the startups themselves.
Investment Numbers Aren’t Necessarily Stable
Additionally, this $324 million may already have shrunk significantly. In a typical ICO, “investors” buy the tokens or coins on offer with cryptocurrencies like Bitcoin or Ethereum rather than with dollars and cents. The price of Bitcoin has crashed since the end of 2017, so $1 million raised in a Bitcoin-backed ICO in December 2017 will today only be worth 40% of that figure. It’s also not representative of industry interest in blockchain: it’s mostly private investors riding the Bitcoin hype, chasing get-rich-quick cryptocurrency schemes.
Energy Companies Are Hesitant
Despite claims to the contrary, blockchain isn’t taken seriously by energy companies. A few have dabbled. GTM list four in its article: Centrica, RWE, Innogy, and TEPCO. Given that RWE’s blockchain investment is through its erstwhile Innogy subsidiary, three utility investments don’t represent a gold rush. Centrica is often at the forefront of technology innovation: for example, it was the first energy company to acquire a smart home technology business. Yet it placed its blockchain bet on LO3 Energy, one of the most mature and visible blockchain companies. Similarly, TEPCO invested in a company with a unique focus: Electron works on device registration and customer switching, a far cry from the cryptocurrency-based transactive energy (TE) business models of most startups.
Be Wary of Bubbles
But what of the big ‘if’ I mentioned above? I witnessed the internet bubble burst in the late 1990s and see many parallels to blockchain today. In that goldrush, investors poured billions into poorly-regulated businesses that promised the world yet only delivered losses. I believe the same is happening with blockchain. While there will be winners, there will be a lot of losers too. Given that TE is by far the most commonly pursued business case, bear in mind that:
- Blockchain startups typically cannot demonstrate an ability to code enterprise-grade applications
- Peer-to-peer energy trading is illegal under most regulatory regimes
- Even if TE were permitted, to date there is no functional business model
- If TE were permitted, the world will only ever need a handful of TE platforms from which to choose.
Investors may well be throwing money into an over-populated marketplace that may not be able to deliver a software product, that supports a business model that fails to gain regulatory approval, or may never turn a profit.
I am positive about TE. I believe the industry can make it work. TE can benefit all participants in the electricity system, especially because its market-based financial incentives can replace existing subsidies. I also believe that around 90% of the TE-focused startups will no longer be with us by the turn of the decade. Investors and utilities, caveat emptor.
Tags: Industrial Innovations, Bitcoin, Blockchain, Cryptocurrency, Finance & Investing
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