There Is No Particular Entity In Charge
by Michael Casey
April 30, 2019
This interview with Michael Casey was conducted and condensed by frank news.
Michael Casey is a writer and researcher in the fields of economics, finance, and digital-currency technology. He is a Senior Lecturer at the MIT Sloan School of Management and Senior Advisor for the Digital Currency Initiative at MIT's Media Lab, where he explores blockchain applications that advance financial inclusion, economic development, and resource efficiency.
We look to define terms as we enter new themes, incorporating blockchain and what it represents within energy democracy would be especially helpful.
To start, how do you define energy democracy?
There's a spectrum of things that would encompass it. The one we've been most focused on, in terms of how it impacts blockchain, is the idea of the ability of the user, and therefore the pro-sumer [the person who is consuming and producing power], to have the right to sell and buy at a market determined price. As it is now, utility is in the middle, purchasing power at a rate they predetermine. There's no capacity to sell to an alternative, other than a single provider.
A world in which I can enter into agreements that have my power purchased at a particular rate, whether that is literally delivering the electrons, or is a contract in which my provision to the grid is compensated at a rate that is determined by the demand for that particular quality of power, is something we're really focused on.
It's the idea that prices can be determined at a true market based level, rather than set by the key intermediary.
Which is the way the current structure is. You build onto that notions of broader democracy. The right to go off-grid, the right to establish your own systems for setting smart meters, for determining what devices are used and when. There's something of a spectrum in the concept, but the starting point we care about most is price, at least that I do.
What about ownership?
That would fall into it for sure. Yes, we definitely would put that into that same spectrum. The idea that the assets can be owned by an individual. There’s varying degrees to this. One is ownership and the other one is finance. The ability for me to finance the acquisition with whomever I can tap, rather than the electricity infrastructure I depend upon, being itself dependent upon the financing vehicles of utility. That I, or my community, can tap external sources to fund what is essentially our contribution to the broader infrastructure. You can get broader and broader with it, but the right to own and control those assets would be part of it. The right to determine how and who finances it is another part.
Where does blockchain come in?
I'll speak to it from the projects I've been specifically involved in. One is a microgrid we are experimenting with in Puerto Rico. I look at it in two ways. First is this concept of finance. I can tap my home or community and establish a microgrid. How might we have that financed by some sort of external direct investor, a social impact investor or investment fund? The blockchain creates the capacity to form what are known as smart contracts.
Are you aware of that term?
Blockchain is a distributed ledger. It, in a decentralized manner, without any particular entity in charge, records the sequence of transactions and then, through a consensus mechanism, every node, every computer, within that network, each maintain their own version of the ledger, and update that ledger through this consensus process.
There is no particular entity in charge. That's a key component.
If you think about how we might move to a world where my transactions, my sale of power, my provision of power, and the funds I receive for those, are not being dictated by centralized utility – then the idea that we’re now no longer going to have one entity in charge of those transactions, and who gets to set those prices and who doesn't, starts to move us into this direction of decentralization.
We might, as a community, decide we're going to nominate some party to be in charge of the ledger, but again you're now trusting that entity to do so. Maybe the community appoints one household to run the ledger, and they're billing everybody, they're acting essentially as a local utility. You really haven't changed the model that much, you've just made it smaller, but it's okay. That could be a more efficient way to do things. Once you bring an outside investor in who says, "I want to make sure my collateral, some claim on that power, and the income that's generated, is being managed in a way that I can trust. I'm external to the community. Who am I going to trust to do that?"
A distributed ledger that nobody can change, gives me the capacity, potentially – I always use the word potentially, because all of this stuff is completely and utterly, in experimental phase right now – it gives us the potential to have my transactions verified without me having to trust the community member that is in charge.
You can imagine a situation where there's an investor in the United States, let's say in Seattle, who has put a five-year bond into the financing of a local community's grid in Africa. He's going to want to have some assurances that asset is being managed in a way that is in the interest to what they paid for. This is one principle idea to think about. Decentralization gives us the capacity, not just for those inside the community, but also outside, to have a relationship like this.
A smart contract is the idea that in addition to managing transactions, in the plain vanilla notion of what that is, payments of money, the actions that are taken by software to instruct devices to do things, or manage a set of contracts, can be executed without any one computer being in charge.
A smart contract is a bit of a misnomer. It implies that the contract is what's going on. The contract is an agreement between you and I. A smart contract says that you and I enter into an agreement and neither you nor I have any power over the computers executing the terms and obligations of that contract, to manipulate it.
How does this work in terms of smart property? I've got collateral, even though I'm living in Seattle and the microgrid I’m financing is in Nairobi. If payments are not met, it's a form of foreclosure or default protection. I funded this thing at a low interest rate because I'm protected. If the payments are not being made, at a certain point the system recognizes this because those payments are digital, they have programmable money qualities, and they stop. A device – a smart meter, one of the devices within the system, can divert that power back to the grid for example, so that the user is no longer using it. You can create a pay-per-use type of structure.
We thought long and hard about this from a social impact, developing world scenario. Could you build tiers into it so that certain devices always stay on because they have to? The hospital needs to have its power. Various things need to stay on, but you could then have some sort of structure in which the least necessary, or least important devices, can be turned off. And that power is diverted back to the grid until the loan is renewed and payments are revived.
You're creating a certain amount of de facto property rights that is the structure of so many other forms of lending. That's the way we think we can drive down the cost of lending. Rather than having to depend upon very centralized public finance models, in which infrastructure is built with access to Wall Street's funding, we now have the capacity, potentially, because I don't need to trust anybody in terms of the execution.
The same goes for the community knowing that the lender can't abuse power over them either.
In that structure we can potentially bypass all of that, and have pools of social impact investors have direct stakes in, and help to fund the development of these smaller off-grid or on-grid types of microgrids. That's what we're working on in Puerto Rico right now. That access to finance. How do we create a sufficient level of protection? There's always the capacity that somebody could monkey with the smart meter. There's various things that could go wrong, but any investment has these factors.
How do you mitigate enough of the risk for the investor, in a fair enough way for the user, to bring down the cost of financing and have more direct access to that financing?
The other part of it is, if you have a true transactive grid, it's not just a two way transaction with me and utility. I'm actually trading with my neighbors and setting up transactions and relationships. Then potentially the blockchain could be there as a way to tokenize the rights of that electricity. The transaction is between each of the participants in that network which itself would also be managed in a decentralized way. There's no utility. There's no large national or state level utility, nor is there even a local community utility. The utility in a sense, is the blockchain. There has to be built into it some sort of price mechanism. People are only going to enter into deals if you can potentially program devices, inverters and like, to accept or divert power over their prices, and meet whatever parameters you've set.
All that functionality, do I transact, do I not? Has the transaction been recorded? So there's no way I could do a deal with one person and actually divert the power somewhere else, and essentially double dip on the thing. All of that needs to be managed to keep the system in balance. That is where we see the second layer of a decentralized blockchain to come.
I feel at this stage, after a long time looking at all this, unconvinced that transactive systems like this are necessarily going to work. I do believe that in some shape or form, if you're going to reach this true energy democracy idea, something like this is where we need to go. But we're not there now. I think that's partly because we have these big, sensitive, national grid structures and it's not clear that the power loads and various sensitivities that go with how you keep the grid alive, and not kill people, can be managed entirely by this sort of structure.
This is just my thinking at the moment. It's not as if the broad principle of a more decentralized way to manage transactions between users and the grid isn't something we should be striving for. I am a believer in the finance part of it. Transactive systems, certainly in on-grid environments, are going to have to be capable of interacting with the demands of large service operators needs.
What about working on microgrids, or moving off the grid? Do you think that creates a better opportunity at moving towards decentralization?
Harvey [Micahel] is actually more of a visionary when it comes to the broader idea of energy democracy. A lot of his thinking has helped me on this sort of stuff.
There's certainly potential in off-grid settings.
The question is, is that very act in itself ideal for people who would have the choice?
Can we have a hybrid? Where you have an off-grid community based microgrid? It's not plugged into the national grid, except at such times when it needs it. So the national grid becomes the back up. That would be ideal. There's a huge political move. You'd need to get these utilities to really step back into a different role. While the grid is functioning in it's off-grid strategy, that is the microgrid, if you wanted to manage transactions within that community in a decentralized way, the blockchain could step in and be that management protocol for that system.
It seems like the private sector and academic institutions are the ones leading this thinking. Do you think the public and the political follow private sector investments?
That's a really good question. I think there are two barriers at arriving at this broad image of energy democracy. The first is that incumbents have a lot of power. Public utilities are heavily regulated. We find this in banking as well.
The inertia that you find within the regulatory agencies is built around the almost ingrained assumption that things must be done in a certain way.
The regulators are told they must regulate the grid in such and such a way, and that is defined by default, under this current centralized paradigm. You have a lot of inertia from regulators who don't want to disrupt the model because you'd obviously have to design completely different regulations for a world in which these decentralized microgrids are built along the lines I just described. That's one barrier.
Then of course, the utilities themselves have their own political clout. If we want to depend upon their infrastructure, all that expensive capital that’s been invested into it, so that their wires are the ones we use to transact amongst each other, how are we going to compensate those utilities? There's an interesting question about how we might do so. It could be that they cease to be the providers of the power, or at least the sole providers of the power, and instead are just service managers and they take a service fee. One way to think about it might be to think about how the US telecoms industry was deregulated in the middle of the '90's. The baby bells were broken up and the like, there was a mandate that the pipes had to be provided to all comers, there would be a fee that would be paid, but there was no way you could prevent, as the owner of those cables, other providers from providing services along that infrastructure. That's one model that might be interesting when you think about it. But those guys, nonetheless, because the way their current profit models are built, and because of their political clout, are a barrier.
The other barrier is also what is the motivator for the public? The core idea of energy democracy is that I'm going to get a better price for my power. That is for buying and for selling.
It’s probably at this stage, too marginal. There's not a big enough change in my savings or my profits as a pro-sumer, to really exist. It just hasn't got that "gee whiz", great motivator behind it. I think that's essentially the problem with lots of business models. It's just too incremental. How do you make this big shift if there are a lot of inconveniences involved? On the other hand, I think there is something wrong with that to some extent. We're not thinking hard about how, if we do decentralize, there's all these other business models and ideas that can be built on top of a more decentralized energy democracy system. Rather than thinking about the savings or profits, that I as a household pro-sumer may or may not make on my existing usage and sale of electricity, how do we incentivize bill systems? We now have all this information generated around price levels and the use of IOT devices, and we get more and more sophisticated, down to the device level – there is a way to actually build all these other services in the community. You treat the excess electricity that's produced as a way to then produce batteries. There's a way to fuel electric vehicles that run bus routes around the system, and those buses end up being almost like a back up battery component to the system. You end up running a much, much cheaper traffic system because there's a dual purpose here. You're the backup, you're the recipient of the excess power, and you're providing a service.
This is a huge challenge for economists. How would we actually design really valuable smart city economic systems that could benefit from the fact that there is this new decentralized system for generating excess power?
How does that get baked into a model that makes the provision of those services cheaper and regulated through this decentralized price signaling mechanism that is a combination of IOT and blockchain, that renewable decentralized energy systems could provide? I don't know what that looks like, but I can envision some very smart, econometric design systems that bring in smart IOT devices that turn on here, turn off there, and create a really rich pool of data around optimizing power, and where and when. There's a whole lot of benefits that could be derived, in a future model that we're not yet visiting, beyond the pros and cons of using it under our current structure.
The problem is people just can't think beyond their monthly power bill. To do that, you need communities to be really forward thinking and experimental in what they could build in the future.
Utility is massive and ubiquitous, but still weirdly opaque, which leaves most people confused. I never think about my utilities bill. Where does trust come into play? Especially with blockchain. Does the public have a distrust in blockchain?
Trust is everything, and trust is the reason for blockchain, ironically.
If designed appropriately, and if we reach the point where software and the models and protocalls that are being developed and constantly refined and proved, are trusted to the extent they should be, then they're actually a trust replacement system. That's exactly what they're supposed to be.
When I was talking about how a social impact investor in Seattle can feel confident that their interests are being protected in a smart property financing structure with a microgrid somewhere else, the question of trust is key. I can't trust the local village chief to act in my interest. We just cannot. We have all these barriers to trust around our economy built on those things. Just as there's no reason why the villagers should trust that if I had control over the devices, I wouldn't manipulate and divert the power to my own interests.
It is precisely the problem of trust you're trying to resolve through a blockchain solution. But you asked the right question because we're not yet there in terms of the public perception of blockchain. I personally feel there's a host of misplaced narratives and a deep level of misunderstanding. Some of which is promoted by vested interests who don't understand what's going on.
There's also a lot of really shady, funky people working in this space that have done some bad things. And they've been able to do bad things because the technology itself isn't advanced enough to be able to give the right level of protection. The good news is there is a lot of work being done on security and improving the system so that we're going to reach this level where a) the confidence that people can have that they won't loose their phones is higher and b) they can do so in a way that they don't actually have to trust a custodian. Because right now in a blockchain, bitcoin type solution, the broader ecosystem around it is still being serviced by entities who have control over your money. It's a bit of a hybrid that's not necessarily reliable.
Systems that have a more decentralized, but also highly reliable security model are coming, and that is going to hopefully bring people around to start placing better confidence and trust in the system itself.
So that it can do what it's supposed to, which is bypass the existing, seemingly failed notions of trust.
If you just look at the way Puerto Rico’s public utility was run, and the abuse, it's hard to say I should trust that. Wait until you see PREPA and what's happened there. There's no trust in the system. One of the reasons why I think Puerto Rico looks like a really good opportunity for us to explore this is because there's such a breakdown of trust in the publicly run system. They're looking for alternatives and we're able to dive in and explore ways we can make it fairer for everybody.