This is the forth in a series of posts that breaks down our article, “Smart After All: Blockchain, Smart Contracts, Parametric Insurance, and Smart Energy Grids,” recently published in the Georgetown Law Technology Review. We previously discussed the enforceability of blockchain-based smart contracts under ESIGN and UETA and the application of blockchain-based smart contracts for simple insurance contracts and parametric insurance. We will now examine the use of blockchain-based smart contracts in the energy industry, specifically for smart meters. You can read the full article here.

The energy industry is actively examining new models and mechanisms for delivering service to customers. Likewise, customers themselves are looking for new ways to purchase energy and to understand the origins of the energy they purchase. Blockchain-based smart contracts can provide a new, more secure basis for smart meters and, in fact, can take advantage of blockchain’s currency foundations to automate payments as well.

Retail energy provides power to customers through energy lines. The electric utility tracks a customer’s power consumption through a meter installed at the customer’s home. At the end of the billing cycle, a customer is sent a bill for their past month’s consumption.

Although this process is well understood by all parties involved, it has several drawbacks. First, by receiving a bill only once a month, it is difficult for customers to obtain immediate feedback on their energy usage. On a hot day, a customer may know that their usage will be higher, but they would not have a way of knowing exactly how much more energy they used that day compared to a regular day. For instance, they may know that keeping the house at 73 degrees will be expensive but not how much more expensive relative to keeping it at 75 degrees. This limits the ability of a household to adjust its usage on a less-than-monthly basis. If a homeowner wants to balance their comfort with low heating and cooling costs, having access to this more granular level of detail will enable them make the best decision. Second, the process relies on customers being able to provide forms of identification and credit, which may be difficult for certain populations, like students and households without bank accounts. Many utilities require either a Social Security number or two forms of identification, including one with a photo.  Even if the potential customers do have those forms of identification, they may lack access to banks or credit cards that a utility requires.

In response, some utility companies have begun to use smart meters, which are electrical meters that wirelessly send meter readings to the utility company. This allows the company to provide a more accurate and up-to-date bill while also freeing the company from needing to send inspectors out every month to read the meters.

Smart meters can go a step further, however, to allow customers to pay as they go rather than rely on monthly assessments and the credit requirements. For example, Arizona’s Salt River Project Agricultural Improvement and Power District (“SRP”) implemented a pay as you go smart meter system, M-Power, which is currently one of the largest pre-paid energy programs in the United States. Under M-Power, SRP installs smart meters in customers’ homes and allows them to use pre-paid smart cards to purchase energy. These cards can be re-loaded at pay centers across the Phoenix metro area, which includes centers that are open 24 hours a day. This system gives customers more control and flexibility over their energy bill, which is particularly beneficial for those with tight budgets, such as lower-income families or students. Customers are also more aware of their energy usage, resulting in a twelve percent reduction in electricity use of M-Power customers. With high satisfaction ratings, SRP’s customer base has also expanded from those needing more flexibility than a monthly electricity bill to include customers interested in measuring their energy use or wanting to reduce their energy use.

Blockchain-based smart contracts could build further on the pay-as-you-go smart meter concept. For example, blockchain-based smart contracts can resolve some security concerns and allow for quicker payments. A recent report noted that smart-meters are woefully insecure, using outdated encryption protocols that can be easily brute-forced. Some customers are also unable to reload their payment cards without visiting a separate payment machine, which can pose a problem if their energy runs out in the middle of the night and no pay centers are open. Finally, some consumers have protested that smart meters inaccurately measure their consumption and overcharge them. By contrast, blockchain-based device authentication tools can augment the security of smart meters on a blockchain-based system.

Blockchain-based smart contracts can also enhance payment processes for smart meters. Instead of relying upon payment cards that must be reloaded at a separate location, with blockchain-based smart contracts paired with smart meters, customers can arrange payments on their phones using blockchain-based smart contracts that execute when their remaining electrical power drops below a certain amount of time left. This makes it easier for customers to pay than the current system, which often requires going to a separate physical location to add to one’s balance. Blockchain-based smart contracts could also be structured so that when an external weather reporting site indicates that the next week will be particularly cold or hot, the contract would automatically add more money to the consumer’s balance to account for the expected higher usage. For some users, the assurance of knowing that they will not need to frantically add to their balance during the middle of a snowstorm or heat wave is worth paying earlier than necessary. The consumer would also benefit from having multiple smart contracts execute during what would have been a traditional monthly billing cycle. The consumer would have more immediate feedback about their energy usage and could adjust in real-time or based on pre-programmed parameters if necessary.

As noted above, blockchain technology also offers benefits of greater transparency for all participants, as well as a greater sense that rules cannot be changed unilaterally. As a result, a blockchain solution can address questions concerning overbilling. With a blockchain-based system, consumers would have direct access to an immutable record of their usage, which could be compared to historical usage or the average usage of neighbors. A user who suspects they were either overcharged or perhaps had their smart meter hacked would be able to compare their usage on an extremely granular level to the usage of their neighbors to demonstrate errors. These benefits may allow companies to reach new markets of people looking for more flexibility or who have difficulty with the traditional requirements.