Grid+ Token Sale: Blockchain Enabled Retail Energy Supply

Grid+ aims to be a utility provider exposing its customers to wholesale electricity prices by streamlining billing and administrative services using smart contracts on the Ethereum blockchain.

Project Description

Grid+ aims to be a utility provider exposing its customers to wholesale electricity prices by streamlining billing and administrative services using smart contracts on the Ethereum blockchain. Grid+ also argues that the additional visibility into the functioning of the energy system and particularly the fluid, evolving nature of billing cycles that it will provide will incentivize customers to install solar panels and batteries, and to purchase energy from localized and distributed generation sources, in order to shift production closer to demand and decreasing energy loss and lowering bills. Grid+ plans to use the Ethereum blockchain for instant settlement of payments for energy consumed on 15-minute intervals.

Presently, energy retailers are responsible for administering and billing consumers for the energy they use. In addition to the cost of the energy supplied, retail prices are marked up to cover administrative burdens, marketing, and risk management associated with bad debts. Since retailers act as credit facilities, providing energy on credit and billing on a monthly basis, they also include expected delinquency and uncollected value (plus a buffer) into their price calculation, with the effect that customers paying their bills on time effectively subsidize delinquent and non-paying customers. In this model, typically only about 50% of a retail electricity bill will go to purchasing the electrical energy itself, while the balance accounts for administrative overhead and the impact of credit risk on a utility’s cost of capital to finance operations.

Smart Agents: An In-home Hardware Gateway

Grid+ plans to reduce the cost of electricity for consumers by automating billing, administration, and risk management using Ethereum-based smart contracts executed by a hardware gateway in the consumer’s home called a “Smart Agent.” The Smart Agent is an Internet-enabled, always-on appliance that securely stores pre-loaded cryptocurrencies and processes payment transactions for electricity in real time. The Grid+ vision is to create Smart Agents that can also programmatically buy and sell electricity on behalf of the consumer, allowing them to leverage the benefits of cryptocurrency without the need to understand the underlying blockchain technology.

Grid+ Value Propositions

Grid+ has both short and long-term arguments for the value it creates for customers. In the short term Grid+ will establish a licensed utility in each of the deregulated markets it will enter, operating as a commercial electricity retailer and undercutting existing retailer prices in the following ways:

  • Automated billing and settlement: Using Smart Agents for billing and settlements over the Ethereum blockchain will reduce administrative overhead costs, which is still largely a manual process for today’s energy retailers who still use centralized customer databases and offer paper mailing. (Grid+ believes this will likely happen at some point, with or without Grid+, but the blockchain is particularly well suited to the processing of micro buy and sell transactions in small, 15 minute, increments and automating the associated payments.)
  • Eliminating bad debts: Grid+ customers will be required to pay for electricity in real-time via cryptocurrency stored on their Smart Agent, which makes payments through blockchain enabled payment channels every 15 minutes or 1 hour (depending on the local system operator). Grid+ customers will also be required to make a refundable deposit that can be partially drawn-down if the Smart Agent fails to pay on time (if the connection is interrupted or if the Smart Agent runs out of funds). Customers are alerted when deposit funds are used, and have the option to top-off deposits that are depleted.
  • Lower marketing expenses: Grid+ believes that while initial marketing costs will be higher than incumbent retailers as they establish a brand and acquire customers, the Grid+ customer acquisition costs will decrease over time as they will offer substantially lower prices.

Grid+ also has a number of long-term value propositions. Providing consumers access to wholesale energy markets, coupled with emerging consumer energy storage options (i.e. batteries), will allow people to take advantage of market-driven price fluctuations.

  • More Efficient markets: Assuming the maturation and adoption of smart-meter technology, data about the entire grid system, including customer endpoints, can enable computation of real-time dynamic distribution costs and allow Smart Agents to purchase and store electricity when the cost is low, and use or re-sell the energy during peak times.
  • Arbitrage Energy: Customers can use the Smart Agent, smart meters, and energy storage solutions such as a battery or Tesla Powerwall to monitor grid prices, purchase energy when it’s cheap, and either use it or resell it  when grid prices rise.
  • Support for P2P markets: As more consumers produce and store energy locally, and as granular data becomes available around dynamic locational market pricing, some customers may opt to exchange energy locally rather than purchasing from the wholesale markets. In this case, customers can utilize Ethereum to facilitate the exchange of energy directly with other customers. Trading in this fashion will be limited to customers of Grid+ or other participating retailers until regulators make accommodations for P2P markets generally.
  • ISO wholesale market integration: Today’s Independent Service Operator (ISO)-operated wholesaler market suffers from many of the same inefficiencies around accounting, settlement, and counterparty risk as energy retailers, only with fewer players and larger trade sizes. Grid+ anticipates extending the technology developed for residential business into the ISO markets.

Business Model

Given that deregulated energy markets currently exist in 17 American states, the potential markets into which Grid+ might grow are considerable. In addition, Grid+ has outlined a range of revenue producing activities that collectively create a compelling story.

On the most basic level, Grid+ will offer its customers energy at a 20% markup from wholesale prices, considerably below existing retail prices in most locales. The sizeable savings Grid+ can offer should ease the challenges of introducing a new company and new technology at the retail level. Grid+’s example of how they anticipate offering consumers in Texas a 38% discount on retail energy tariffs is particularly effective, for while there are surely many energy users who do not entirely understand or are ambivalent about ‘smart contracts and micropayments on the Ethereum blockchain,’ one assumes that most understand ‘38% savings.’

Above figure from Grid+’s whitepaper represents the variance between wholesale and residential electricity rates in Texas. Note how in 2016 around half of residential rates came from the various additional fees added to wholesale rates, effectively doubling residential rates.

Beyond this most basic aspect of its business, Grid+ expects to develop several additional revenue streams. One comes from the sale of its Smart Agent hardware. The Smart Agent devices are projected to retail for $50, and Grid+ has indicated it will be selling them at cost, at least initially. But the qualifier noting that sales at cost may only apply to an initial period also suggests this could change. With projections for the service to scale globally and potentially serve millions of customers post-2019 (the “Musk Epoch”,) increases to the retail price of the Smart Agents could represent material amounts.

Another revenue stream is intended to come from fees on transactions occurring on the Grid+ network. While indications are that individual fees will be modest, depending upon how these are calculated the final sum could be significant to Grid+’s overall fortunes.

Finally, given the number of transactions that will be required for customers to exchange fiat into Grid+’s BOLT payment tokens (discussed below) the company proposes to develop its own Raiden hub operating on the Ethereum network. This is intended to be created during Phase II (the “Tesla Epoch”) which runs from Q4 2018 to Q3 2019. Not only will this allow the Grid+ network and its BOLT tokens to operate more efficiently, this will also generate a new revenue stream for Grid+, as its Raiden hub will be large enough to qualify it as one of the larger on the entire Ethereum network, allowing it to capture revenue as it processes a wide range of transactions across the network.

Taken together, there are a number of reasons for highly optimistic views of Grid+’s prospects of finding a positive initial reception, developing its business, and spreading its model widely as its technologies and reputation mature.

What is the Token Being Sold?

Grid+ plans to operate with a two token model:

  • BOLT Tokens: Treated as a “stable coin” redeemable by Grid+ customers for $1 worth of energy from Grid+ and backed by USD deposits and government bonds (so that BOLT value is pinned to the USD). Customers will purchase BOLT through a web interface using a credit card or bank transfer, with tokens sent to the customer’s Smart Agent which manages payments in real-time until the deposit of BOLT runs out (Grid+ plans to offer automatic payment options). BOLT tokens are minted upon purchase and destroyed upon redemption.
  • GRID Tokens: Allow Grid+ customers to purchase electricity from Grid+ at wholesale prices without additional markup. A fixed number of GRID tokens (300 Million) will be minted before the upcoming token sale—this will be the only time GRID are created—and GRID tokens are destroyed upon redemption. Each GRID token is redeemable for 500 kWh of electricity from Grid+ at the wholesale price available to Grid+ in the customer’s jurisdiction at the time of energy purchase (the value is associated with the wholesale energy price at the time the energy is purchased, NOT when the GRID token is purchased). As Grid+ intends its markup above wholesale prices to be around 20%, a geographically-determined retail value of roughly $10.00, minus whatever discount rate one considers appropriate for energy to be consumed in the future pending successful resolution of a challenging series of software and hardware challenges, can be attached to the GRID token.

Of the 300 million GRID tokens, 90 million (30% of total) will be available in the pre-sale and sale. A further 60 million (20%) will be retained by the Grid+ founders and team, with an additional 20% to unnamed ‘external owners of Grid+.’ The final 30% of tokens will be retained by Grid+ to be used in various business development and incentive programs.

Future Opportunities and Challenges for Grid+

Assessing Grid+’s prospects is a fascinating exercise, for while the project is built around a compelling core value proposition representing a strong argument for its future success, a number of potential challenges can also be identified.

At the most basic level, offering consumers substantial saving on energy, as in the Texas example with 38% savings, is exceptional. In this age of incessantly rising prices for anything useful, this represents a pleasant change and reason enough to expect the network to enjoy considerable success.

While Grid+ claims it will promote the deployment of individual solar and battery technology amongst its consumers–claims its whitepaper do not meaningfully substantiate beyond suggesting that increased knowledge will naturally lead people to make good decisions–the smart agent’s capacity to programmatically deploy buying strategies that shift demand to cheaper off-peak hours will allow a virtually effortless shift in consumer behaviour, at least amongst consumers equipped with storage or other smart energy infrastructure supporting such practices.

Contrasted with these arguments in favor of Grid+’s likely success, there are a handful of identifiable challenges as well. One is simply the crowded nature of the energy space. In addition to being one of the largest industries on the planet, with innovation being pursued by everyone from oil majors to governments, utilities, and research universities, with a substantial number of blockchain companies are tackling different approaches to disrupting the energy sector. Within this crowded field the possibility that an even more compelling approach may emerge is impossible to discount.

Related to the above is also the matter of Grid+’s early stage technology and the entire project’s considerable implementation challenges. As the whitepaper indicates, for instance, the company does not yet have a stable hardware prototype of the smart agent, and that until this has been satisfactorily achieved the software cannot be completed. Assumptions for product development and rollout thus remain speculative. The company anticipates solutions to these problems will be addressed during Phase I (its “Edison Epoch”) which runs through Q3 2018, but given this is not just a software project but also includes manufacturing physical products, this may be an aggressive timeline. Any difficulties with the above could call into question Grid+s ambition of enrolling the initial 5,000 customers during this period. Delays in the initial period may well cascade into subsequent phases, in the worst case lengthening the overall development timeline.

Another potential risk is that Grid+ appears to be making the reduction of credit risk, and the associated reduction in its cost of capital, central to its strategy of competing with existing energy retailers. Grid+ does not appear to have any profound technological innovation or exotic use of the blockchain underpinning its strategy. Rather, a relatively straightforward use of the blockchain to automate billing, combined with reduced billing periods and micro-payments from pre-funded accounts to eliminate payment cycles and thus the need to finance customers over periods that can stretch to 90 days for many utilities, appears to be at the heart of its strategy. This implies that Grid+ could face competition on a number of fronts, particularly as practices like net metering or micropayments aren’t necessarily blockchain dependent. One also imagines that traditional energy retailers in Grid+’s target markets, entrenched companies with existing clients who presumably will not idly observe a more automated competitor stealing its market share, could develop means to challenge Grid+’s attempts to enter new markets. On the other hand, once Grid+ has done the hard work of introducing the concept and establishing the marketplace one could also imagine a copycat company entering the space with a 15% markup and a no-fee smart agent, better algos that allow it to purchase energy more cheaply, or some combination.

Another point relative to reducing credit risk, payment cycles and associated costs of capital for energy utilities is that Grid+ may well be overestimating or overstating the savings it can expect to harvest. While eliminating payment cycles will help the company reduce risk, margins, and expenses that will allow it to profit even when selling electricity at reduced rates to retail consumers, in establishing permitted utilities Grid+ will be entering a complex regulatory system that will not allow smart contracts to simply disconnect the electricity of customers once a 15 minute billing cycle has gone unpaid. While Grid+ has suggested that its maximum exposure to delinquent accounts could range from 3-15 days, each jurisdiction has unique rules, and the company will be forced to comply with various regulations that could complicate its efforts to reduce its credit risk by the anticipated amounts. The new system will also be subject to yet-unknown general risks, and more focused credit risks, attributable entirely to the technology, such as disconnects of devices or potential hiccups in the network.

On a different note, will projections for lower marketing costs be accurate? Grid+ projects that after an initial period word of mouth will allow it to more easily attract customers, but this could be derailed in many ways. The emergence of new blockchain-based competitors, or the responses of entrenched utilities, could undercut the company’s forecast margins, requiring additional marketing expense. From a different perspective the worst case of a smart agent programmed for automated energy trading suffering a hack leading to theft or trading losses, or simply going rogue and doing a Jerome Kerviel or Yasuo Hamanaka, the resulting individual or network losses would create rather substantial image and security problems. At the very least, one assumes marketing would be a bit more challenging than previously imagined.

One of the most interesting observations to emerge from an examination of Grid+ is that this application of blockchain technology has not fundamentally altered the customer-provider relationship that pervades the existing energy system. While Grid+ does envision its system facilitating the emergence of a widespread p2p system where retail energy consumers are also small-scale producers and storage providers exchanging energy with other retail level “prosumers” in their local community–a vision in which Grid+ becomes largely just a payment facilitator–that vision is undoubtedly far-off. In the short-term, the primary application of blockchain technology is to eliminate credit risk in the billing cycle, not necessarily distribute ownership of the grid or energy production. Instead the GRID token is a coupon for cheaper energy services that expires upon use while the BOLT token is a means of real-time payment. The payment infrastructure could undoubtedly be helpful in a P2P energy architecture, though probably neither necessary nor sufficient for it to emerge on its own. But even in a basic scenario, Grid+ would  likely develop as a profitable but not catalytic company even if it focuses simply on delivering energy wholesale from the existing array of producers.

A Sophisticated Team and Community of Advisors

Grid+ has a strong, well-connected, and experienced team. The ConsenSys group, from which Grid+ emerged, has a wide range of experience and expertise, and has maintained a focus on energy for more than two years, beginning with the TransactiveGrid project that created a microgrid in Brooklyn and continuing on through other projects that saw the team working to develop new energy exchanges and working with utilities globally on different projects.

Cofounders Alex Miller, Karl Kreder, and Mark D’Agostino are all experienced members of the ConsenSys team who also possess experience in the energy sector. The company’s advisors also largely come from ConsensSys and its related companies of venture investors and technical and sectoral investors. This instills confidence that the team either has at its disposal, or can relatively easily acquire expertise relevant to virtually any situation that might arise.