Decentralized Energy and the Future of DeFi

As decentralized energy grows into a more significant part of the world's power supply, DeFi is playing a key role.

What you will learn

  • Decentralized energy systems rely on small-scale electricity supplies known as distributed energy resources (DERs).

  • Virtual DERs, or virtual power plants, are collections of physical energy resources sold as a single resource.

  • DeFi applications can facilitate the buying and selling of DERs, and tokenized digital assets can be used in relation to virtual power plants.

What you will learn

  • Decentralized energy systems rely on small-scale electricity supplies known as distributed energy resources (DERs).

  • Virtual DERs, or virtual power plants, are collections of physical energy resources sold as a single resource.

  • DeFi applications can facilitate the buying and selling of DERs, and tokenized digital assets can be used in relation to virtual power plants.

Of the many economic sectors in which distributed ledgers can help, the power grid is one of the most intriguing. In its current state, the energy system is managed by centralized entities, and energy production is handled onsite at power plants. However, the same technology that is fueling decentralized finance can be applied to decentralized energy.

Like traditional finance, centralized energy provides great benefits to society but has its flaws too. Political conflicts and natural disasters can disrupt energy supplies or cause dramatic price increases that put people at risk physically and financially. The centralized methodology also can be quite inefficient.

In response to these forces, developers are creating ways to apply DeFi platforms, digital currencies, and the crypto ecosystem to the business models of energy. In this article, we'll look at how decentralized energy might impact the future of DeFi and how the crypto space may shape the future of decentralized power.

Background of decentralized energy

Decentralized energy systems rely on small-scale electricity supplies known as distributed energy resources (DERs). These systems are generally located close to energy consumption sites and can be aggregated to meet energy demands. This "close-to-home" approach eliminates many inefficiencies associated with centralized power plants transmitting energy across lengthy distribution lines.

Many DERs are renewable energy resources and can be bundled together as virtual resources. Virtual DERs, or virtual power plants, are collections of physical energy resources sold as a single resource. For example, energy produced by a solar panel array could be bundled with hydroelectric and wind turbine resources.

Decentralized energy systems are used on a smaller scale in many areas already. For example, the Brooklyn Microgrid (BMG) project is an energy marketplace leveraging blockchain technology and smart contracts to enable solar panel owners to sell their excess energy to NYC residents. The Sonnen Community uses batteries that store extra solar energy to create clean energy virtual power plants in Germany, Denmark, Spain, Italy, and the United States.

Organizations like the National Renewable Energy Laboratory (NREL) are working on ways to use the distributed generation model to transform the entire power grid.

Energy decentralization components

  • Off-grid distributed energy resource. These include small DERs like solar panels used to power a single home and energy generation technologies in off-grid areas, such as those in developing countries.

  • Grid-connected distributed energy resource. DERs connected to a central grid that can be used to power homes and businesses.

  • Distributed generation. Energy generated by a decentralized collection of DERs.

  • Energy storage. Technologies like batteries that store energy when supply exceeds demand.

  • Energy market. A commodity market where participants buy and sell energy resources. These are generally traditional financial markets, but there are a growing number of DeFi energy markets as well.

  • Demand response. Tools for power grid supply management, including new technologies like IoT devices and smart contracts.


Implementation of decentralized energy

Implementing a large-scale decentralized energy system will require energy policy and infrastructure changes, as many countries rely on state-controlled energy markets. DeFi applications can facilitate the buying and selling of DERs, and tokenized digital assets can be used in relation to virtual power plants. Additionally, companies and individuals will need incentives, such as tax breaks and monetary compensation, to participate in these decentralized power systems.

Education campaigns can help businesses and individuals understand the benefits of participating in the decentralized system.

Improved efficiency

According to the Natural Resources Defense Council, "The U.S. grid loses about 5 percent of all the electricity generated through transmission and distribution — enough to power all seven Central American countries four times." This waste is due, in part, to the great distances energy must travel to get from centralized power plants to consumers.

The decentralized approach involves a collection of small-scale energy producers located throughout the grid. Machine learning algorithms and smart contracts can predict energy use throughout the day and deliver power where needed. Additionally, batteries and other energy-storage solutions can improve energy efficiency by ensuring excess capacity isn't wasted.

Enhanced security

Per the U.S. Government Accountability Office, "There are several points of vulnerability in the U.S.'s system of electricity grids. For example, grid distribution systems—which carry electricity from transmission systems to consumers—have grown more vulnerable, in part because their operational technology increasingly allows remote access and connections to business networks."

With centralized power sources, a cybersecurity attack, infrastructure failure, or natural disaster could leave entire regions without power. Decentralized systems are more resilient because one DER failing wouldn't significantly impact the overall system. Additionally, decentralized energy systems might reduce a country's reliance on imported energy.

More transparency

The power grid is fed energy from various sources, including fossil fuels, nuclear energy, and renewable energy. However, there is no way to know how much of your energy comes from renewable sources, as it's mixed in with other types of power. Virtual power plants stored on distributed ledgers could enhance transparency surrounding energy sources.

Lower costs

Capital is required to build and maintain power plants; some of this capital comes from investment banks and other financial institutions. Consumers pay some of those costs through their monthly bills.

A decentralized energy system could incentivize businesses and individuals to participate in energy sharing without the need for centralized finance institutions, resulting in lower costs.

Future of decentralized energy in DeFi

Energy trading is an essential element of any decentralized energy system. The DeFi space is equipped to handle the growing energy market's financial transactions and security needs. However, the DeFi protocols involved in DER management must have a track record of supporting decentralized applications used for energy resources, carbon credits, and ESG reporting. Ideally, decentralized energy should use environmentally friendly DLTs that are carbon-neutral or carbon negative.

Hedera's business model incorporates carbon credits and other initiatives to fight climate change. The Hedera DLT is used to build various projects supporting clean energy and ESG management. For example, the cloud-based Now Platform uses Hedera and a series of IoT devices, AI, and human observers to determine whether policy conditions are met when creating tokenized carbon credits or International Renewable Energy Certificates (IRECs).

These advances are helping the DeFi ecosystem to become a necessary component of a successful decentralized energy grid. 


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