Most heat networks in the UK are natural monopolies, which limits opportunities for competition. But what would a more competitive market look like and could blockchains help bring it to fruition?
Imagine a heat network where each residential or commercial block is a customer, who is free to choose from several heat suppliers. Those suppliers might purchase wholesale heat from a range of generators – say, a waste-to-energy plant, a gas combined heat and power (CHP) system, backed up by gas boilers, and a water source heat pump – all feeding into the unified network. An operator could be paid to transport heat between generators and customers.
Imagine that customers who are not happy with the price or level of service from their supplier could simply switch to a different one. Generation capacity could be so diverse and reliable that customers wouldn’t need backup or peaking plant in their basements.
A competitive heat market sounds fantastic, but there are potential issues – many to do with coordination. For example, how do you match supply and demand across multiple parties in real time? What happens if a supplier requires more or less heat than they have contracted for? What if a generator puts more or less heat into the network than planned?
We might look to other utility markets, such as electricity, for ideas. That system is a single, large, integrated network, designed around large generators putting electricity into the transmission network. This carries electricity to 14 distribution networks, which connect to every customer in the UK. In other words, it’s one big system connecting every customer to every generator via the distribution and transmission systems. In contrast, there will be many district heat networks across the country, rather than one monolithic network. These will range in size from the minimum needed to support a competitive market – say, several thousand homes – right up to city wide scale.
A blockchain is a digital ledger, the truth of which is agreed upon by the parties that write to it
Determining use and imbalance takes a long time in the electricity market. As meter data trickles in, imbalances are calculated four times over 14 months, with the picture becoming a little clearer each time. If we have a clean slate for heat, is it too much to ask that imbalances are reconciled once a month? Why not weekly? Or daily? Come to think of it, if all meters are networked, why shouldn’t use and generation data be current within an hour?
In the electricity market, trust is concentrated in the National Grid. Parties have to tell it – via a notification agent – about all contracts, so they can be used in balance and settlement calculations. Imbalances are settled centrally.
This approach probably won’t work for the heat market. Parties must be able to interact easily and quickly; for example, when notifying contracts or working out how much heat has been produced or consumed. Waiting on a central nationwide authority would be cumbersome.
Becoming an electricity supplier is expensive. The licence itself is cheap, but the cost of IT systems (needed for operations and for compliance with Balance and Settlement Code) is high, as is the cost of specialist people.
When you look at it closely, the electricity market is slow, clunky, arcane, expensive and highly centralised. In contrast, we want many heat networks of varying sizes to function as markets that are fast, efficient, accessible, cheap and decentralised.
How else might we address the challenges posed by a competitive heat market? One way is to use a model based on blockchains, the technical innovation that underpins cryptocurrencies such as bitcoin and ether.
A blockchain is a continually updated digital ledger, the truth of which is agreed upon by the parties that write to it, even if those parties don’t trust each other. Most of the time, blockchains are a trendy solution in search of a problem, but – in the case of heat networks – they may be just what we need. This is because blockchains:
- Are decentralised; each participant on the network holds a copy of the digital ledger
- Are constantly updated; new blocks can be added and confirmed as often as agreed by the participants
- Are practically indelible; once new information has been added to the blockchain and confirmed by the other participants, it’s difficult or impossible to change
- Enable decentralised consensus; the rules for writing to the blockchain are embodied in the software run by each participant, each of whom can ‘vote’ to change these rules by altering the software
- Are low cost; many blockchain implementations, including bitcoin and ethereum, are open source
- Impose security and accountability; the use of cryptographic keys proves who did what.
The parties involved on each district heat network are the customers – for example, residential or commercial blocks – generators, suppliers and the distributor. In this model, each market relies on three key systems: an exchange, a blockchain (aka distributed ledger) and the blockchain software that determines how parties write to the ledger.
The exchange is the electronic marketplace where the parties come together to compete and enter into contracts. Importantly, it’s the mechanism that allows pricing information to flow between the parties, right up to the current settlement period. It’s not the only way to agree a deal, however; parties would also be free to enter into contracts voluntarily, outside the exchange.
In this model, the blockchain ledger holds all:
- Contracts between parties, from the first day of operation right up to the current settlement period
- Payments between parties. These are records of real pounds and pence, changing hands between the parties. To be valid, these transactions must be signed, proving payment and receipt – an approach dubbed triple-entry accounting
- Heat delivered onto the network by generators, by settlement period
- Heat taken from the network by customers, by settlement period.
Each party on the district heat network runs the blockchain software on at least one computer with a reliable connection to the internet. This means they maintain and write to their own copy of the digital ledger.
The blockchain software embodies the rules of the game for each network. This includes, for example, imbalance pricing method and how to resolve conflicting meter readings at a contract boundary.
All parties have the opportunity to write to the ledger, but a given party’s version will only be accepted by the other parties if they have followed the rules embedded in the agreed version of the blockchain software. The blockchain software for district heat must be open source, and totally free.
Does the proposed model meet the needs of a new competitive heat market? I think it does. Much more work is needed before we know whether this approach is viable, but it’s an idea worth exploring further.