Blockchain meets Energy: State of the Market

Was it only a week ago?

On February 14 and 15, two communities met in Vienna, Austria to discuss the promise, prospects and challenges of applying blockchain technology to the energy sector. To many in the audience, Event Horizon 2017 felt like a turning point. Energy professionals, caught by surprise by the rise of distributed generation, wouldn’t miss the next wave of disruption. Blockchain innovators, touting the benefits of decentralization, were ready to rumble with a notoriously inert industry.

The enthusiasm in the room was palpable, buoyed by the extraordinary production put together by the organizers (Ed Hesse, Ana Trbovic, Stefanie Gruendl and team) and the presence of star speakers like Vitalik Buterin or Gavin Wood. What a show!

I had the pleasure and privilege to keynote the event, and to moderate the pitching series, in which 15 of the brightest minds in blockchain and energy presented their ideas and businesses. In a “State of the Market” presentation, I tried to contrast the hype and headlines of 2016 with what I have heard from investor and corporate clients involved in the space. Since then, I have been overwhelmed with encouraging words from participants – and requests for the slides I went through. As they’re a bit dry by themselves, I thought I would take this opportunity to write a short commentary, and share them with the wider community of blockchain enthusiasts. Here goes.

Our approach

When looking at a new technology or application, Cleantech Group’s approach is usually to start by collecting as much publicly-available information as possible: who are the start-ups in the new space? The investors? Who is receiving funding? What strategic partnerships are being struck? Once we feel like we have a comprehensive data set, we test our hypotheses by talking to the key players in the ecosystem – top start-ups, investors and large corporates. We organize round-tables, sit in private meetings, interview the best innovators – generally try to get a sense of drivers and barriers behind adoption.

This method, though simple, is quite effective at going beyond the headlines, and gauging both the disruptive potential of a technology, its maturity and how the market is moving.

What public information tells us

When it comes to “blockchain meets energy,” the first story we read in the publicly-available data is how many use cases are being tested and piloted:

Peer-to-peer energy trading is of course the use case appearing the most often in the press, with ventures such as LO3, Co-Tricity and Grid Singularity making the headlines, but a few others follow closely:

• Electric vehicle charging and mobility services, with the idea to tackle challenges such as fragmentation of charging infrastructure, or the high costs of joining networks;
• Securing the growing Internet of Things, or enabling machine-to-machine communications;
• Supply chain, using decentralized ledgers to track where a good is, and in what state, along a supply chain.

This simple map does not do justice to the ecosystem, and is missing 3 types of players:

• Start-ups innovating in multiple use cases;
• Large corporates and utilities, like Fortum and Innogy, piloting use cases of their own;
• Generalist enterprise blockchain start-ups that could enter the energy field, and compete with energy-centric innovators. A more realistic map would look like this:

So which of these use cases is getting the most investment and partnership traction, according to public information?

Over the past couple of years, we have observed three main movements:

• In 2015, much of the deal-making revolved around the IoT use cases, with start-ups like Ledger and Filament receiving funding;
• In early 2016, attention shifted to the supply chain use case, with Skuchain, Gem and Chronicled leading the way;
• Core energy applications followed closely, but mostly with partnerships, like Transactive Grid and the Brooklyn Microgrid. The only sign of funding publicly available was Electron‘s seed round towards the end of the year.

Here’s a timeline of the top transactions we tracked:

While we were crunching our data set, we had the idea to look at follow-on rounds in the sector. An interesting finding was that follow-on cycles are quite short in the blockchain space. The average time lapse between seed and Series A, or Series A and Series B, was around a year. This is to be compared with the typical 18-24 months for other early-stage technologies we track.

Note that the above is due for a refresh – to account for some of the rounds we heard about in Vienna.

The last learning we drew from the data set we collected is one of a clear geographical funding gap. With Europe housing so many of the top blockchain innovators, it was surprising to see that North America led financing by a 5:1 ratio. To give a comparison, our current tracking of Artificial Intelligence in energy has that ratio at 2.5:1. Here are the numbers:

Pausing here, and taking stock of what publicly-available data have to offer, one could make the following predictions for 2017+:

• We will see some interesting follow-on activity in IoT and supply chain use cases;
• Some rounds will close in core energy use cases, such as peer-to-peer trading;
• A fair share of the action will take place in Europe, which is bound to fill some of the funding gap.

Now, the million-dollar question is: are investors and corporates actually moving in that direction? This is where the data set needs to be complemented by some of the things we hear behind closed doors.

What our network tells us

Before getting to quotes, it’s worth clarifying who we consider part of our network. They typically fall into 4 buckets:

• VC investors on our Advisory Board, subscribing to our research platform or coming to our events;
• Large corporates (industrials, utilities) that we help with investment scouting, research or networking services. At those, we typically talk to the CVC unit, Innovation division or strategy/M&A teams.
• Start-ups presenting at our events, using our i3 platform, taking part in our Global Cleantech 100 program, or just great entrepreneurs we regularly get introduced to;
• Enablers, such as consultants, lawyers, economic development agencies that help facilitate connections in the ecosystem.

Here are a few of the organizations we talk to, either on blockchain specifically or other topics:

So what were the main messages we heard from this network?

First, there is a notable disconnect between the use cases that are most publicized, and those that investors believe are the most promising, at least in the short- to medium-term. In the public sphere, the two use cases that are getting the most attention are peer-to-peer energy trading and EV charging. However, many corporates and investors recognize that the underlying transaction volumes in these two areas are small today, when compared to the general energy and transportation markets, and may not be enough to sustain commercial routes for a young start-up ecosystem.

Conversely, investors and corporates point to some use cases that could be lower-hanging fruits, where blockchain could bring efficiency to large transaction volumes:

• Using blockchain technology to streamline wholesale energy trading, for instance, is put forward as a promising one (see btl.co’s latest partnership with Wien Energie);
• Helping utilities gain efficiency in their billing process is another;
• Providing transparent certificates of origin for renewable energy production, as well as other commodities;
• Use cases around both and IoT and supply chain are also thought to be more commercially mature, and relying on growing installed bases.

A note that while use cases like billing and wholesale trading are usually floated as lower-hanging fruits, finding utility partners that are willing to open these strategic businesses to potential start-up partners is not easy. It is good to see some early signs of collaboration around these topics from partnerships like the Energy Web Foundation.

The second finding is that corporates are generally ahead of VCs in examining the space, and making strategic moves. This is a rare occurrence, which can be explained by a couple of factors:

• Many venture capitalists consider that energy use cases are too early, that successful business models haven’t emerged, and that the valuations proposed are too high for the level of risk the deals present;
• Corporates, and especially utilities, on the other hand, attribute a lot of disruptive power to blockchain, and are willing to risk (limited) capital and resources for the chance to define their role on the other side of the disruption.

The general sentiment is that while VCs will steer clear of energy-centric plays in the near-term, some corporates may jump in, either collectively (in consortia or research groups) or individually. This presents both risks and opportunities for start-ups: large corporates can open doors to pilots, projects and exits – but they’re also prone to re-organizations and changes in strategy, making them potentially unstable partners.

Where does that leave us?

The series of 15 pitches following this presentation was fascinating – as was the investor panel after that – but more on that later. I left Vienna with 4 main thoughts in mind:

1. The energy industry is convinced (rightly or otherwise) of the disruptive power of blockchain;
2. While VC funding may only come further down the road, start-ups will find corporate partners to fund the development of specific use cases;
3. What use cases they prioritize, and how they monetize them, is bound to drive their eventual success or failure.

The fourth is that the team at Event Horizon and Grid Singularity knows how to throw a party. I would like to extend my thanks to Ed, Ana, Stefanie and team, who made these two days unforgettable, and are doing so much to build a community around the theme. 2017 will be an eventful year for blockchain and energy – and we’re excited for the ride.

If you would like to get the deck in a pdf format, hear more of our blockchain coverage, or would be interested in sharing your thoughts with us, you can find me at jules.besnainou@cleantech.com or @julobes. Blockchain is only one of the topics we cover at Cleantech Group – other practices include AI, grid cyber-security, augmented reality, decentralized energy, robotics and more.