Web3 and the Energy Transition: A Policy Primer

The rise of web3 could become a defining moment in the energy industry's evolution – but we have limited understanding of the potential this new, blockchain-based iteration of the internet holds for the sector. What are the opportunities and challenges presented by web3 for the energy industry, and what should policymakers do to respond to them?

In this explainer, we examine what makes web3 different and show how it can improve energy-related transactions through automation, transparency, verifiability and democratisation. We also explore the policy challenges, including innovation and regulatory risks.

Despite web3's potential, significant hurdles remain to maximising its benefits for the energy sector – so we conclude by setting out next steps for governments to consider when developing their approach. Policymakers must update energy-market regulations to allow web3 to flourish while addressing areas where existing laws are no longer appropriate or relevant.

The term web3 refers to a vision for what the internet could look like in its next iteration – decentralised, and underpinned by blockchain technology. Having evolved from the days when it served read-only content into today’s version where social interactions thrive, the internet is soon to enter this third generation. It will see advanced technologies from artificial intelligence (AI), the Internet of Things (IoT) and distributed ledger technologies (DLT) colliding with traditional web technologies. Different labels are already being applied – the semantic web, the spatial web, the decentralised web and others – but these do not necessarily help us understand the impact. Nonetheless, as with previous internet generations, web3 is likely to be transformative.

The energy ecosystem is also changing. In many countries, increasing volumes of clean energy are entering the grid alongside the mass deployment of smart meters. We are seeing more electric vehicles on the road while homes, appliances and devices are becoming “intelligent”. The growing number of distributed energy resources (DERs) is heralding a new phase of energy transition.

But while web3 represents a vital innovation frontier, there is limited understanding of how it will affect the energy industry. What big shifts can we expect from web3 in energy generation, distribution and usage, and what are the implications for carbon emissions? Given the central role of data in web3, what needs to be done about data governance, security and privacy? The technology presents significant opportunities and risks, and understanding both will be critical.

Looking first at the opportunities, web3 can improve energy-related transactions in at least four ways: verifiability, transparency, automation and democratisation.

1. Verifiability

With more than 25 billion smart devices connecting to the internet by 2030, machine-to-machine (M2M) communication will create new forms of activity, collectively referred to as the “Economy of Things”. Web3 will allow “things”, like vehicles or devices, to connect and exchange information using decentralised identifiers (DIDs). The identifiers will help grid operators, e-mobility companies and energy firms to verify customers participating in the energy market.

Once identities are verified, energy services can be tailored to individual households, businesses and even single devices, potentially leading to cost reduction and better demand forecasting. Electric vehicles and smart appliances would be able to save costs by using energy outside peak times and better integrating renewable energy sources.

Users and devices would get an alert whenever the power grid faces a critical need for energy conservation so the system can rebalance. Clearing processes for energy trade would be simpler, reducing transaction costs for market participants.

2. Transparency

The energy industry needs higher transparency standards for some of its transactions. For example, carbon offsetting (compensating for carbon emissions made in one place by making an equivalent reduction elsewhere) through the trading of carbon credits often suffers from transparency issues. The energy industry contributes over two-thirds of global emissions, and with a problematic carbon-offsetting framework, energy companies are at risk of gaining an unwelcome reputation for “greenwashing”.

Voluntary carbon markets will be worth about $50 billion by 2030 as more energy companies strive to reach net zero. However, the voluntary offsetting market operates under different standards and procedures. It works with little consensus or agreement on assurance and integrity, and when it does, it is often on a project-by-project basis.

Through web3 and its underlying blockchain, the voluntary carbon market can thrive. Web3 technologies like DLTs and the IoT could accelerate standardisation and accountability by measuring and managing environmental data in real time. For example, the IoT could ensure that connected devices across a company’s value chain share ecological-impact data and execute smart contracts based on precise emission calculations.

Web3 could enhance comprehensive regulatory structures that ensure the transparency and integrity of the carbon market. In carbon markets, where verification processes can be cumbersome, web3 would increase accessibility, cut out intermediaries and lower transaction costs. Introducing web3 to the carbon market would be an essential step in helping smaller market players overcome barriers to entry and would enable them to trade cost-effective credits.

3. Automation

Web3 could give grid operators a powerful tool to help them interact and manage distributed assets across the grid automatically. Operators often need greater flexibility and better grid management as more devices connect to the grid.

Smart contracts based on web3 will make it possible to execute agreements between energy producers and consumers without human intervention. Web3 would also help undercut costs for energy providers by simplifying and automating their back-end processes. For example, the reconciliation of imbalances in power and markets, which can take up to 28 months, can become faster. Web3 will allow transaction recording and settlement almost instantly and with minimal reconciliation effort, without relying on an intermediary.

4. Democratisation

Web3, as it is currently conceived, will have no central authority, and decentralised autonomous organisations (DAOs) will provide governance frameworks. Data from devices and their users will be user-owned, minimising the dominance of big-data banks and companies. No intermediary would be required to verify or broker transactions, resulting in lower transaction costs in the energy-resource marketplace, potentially reducing energy prices.

One consequence is a lower entry barrier to small energy-market players, particularly prosumers (parties who are both energy producers and consumers) and small renewable generators. These small entrants will be able to sell and buy energy directly in the market, monetising their energy assets.

A range of issues still needs to be addressed in the energy sector if it is to govern its future by DAOs. For example, regulation on who can participate in the markets must be updated, while businesses must move to a collaborative model. But web3 can provide a viable framework that allows interested parties to have their say in the decision-making process.

Innovation Risks

Though web3 has the potential to accelerate a transformation of the energy industry, there is the risk that the technology may not be deployed quickly or widely enough for its benefits to be realised. Web3 developers still face a number of technological and commercial hurdles.

One such challenge is managing a massive number of transactions per second (TPS) in real time as more smart devices come online. Another hurdle is the enormous amount of energy currently required to validate transactions. Validation under some consensus protocols like proof-of-work requires large amounts of computing power. As with Bitcoin-mining under the proof-of-work consensus mechanism, which presently consumes more than Finland's annual energy use, blockchain validation for energy transactions would require large amounts of computing power and electricity.

Companies are experimenting with alternatives to web3 with many proofs of concept and minimum viable products in the pipeline. But challenges remain. Organisations like the Web3Foundation are trying to bridge the gap by enabling data transfers across public and private blockchains by connecting chains to Polkadot's secure relay chain.

Alternatives to traditional blockchain such as the directed acyclic graph (DAG), which requires minimal energy, are also being built. At the same time, there are ongoing projects to develop different ways to achieve consensus on creating a blockchain with lower energy requirements. Making these solutions work at scale is, however, a challenge. Companies could create their own blockchain, for example, but without a straightforward way to communicate with the external blockchain, usability and scalability become limited.

Developing the technologies from proof of concept to full-scale deployment requires pulling a range of policy levers to encourage innovation, including grants, R&D subsidies and public procurement. Without the policies to support such innovation, there is a high risk of failing to reach a critical mass of users.

Having a limited number of users on the underlying blockchain network makes the technology less viable as the security and efficiency of some distributed technologies depend on the number of users.

Regulatory Risks

The growing use of web3 in the energy industry could mean that existing regulations will no longer be fit for purpose. For example, assumptions about traditional utility companies being the sole energy suppliers will be out of date and it is likely to be necessary to revise regulations covering the power sector. The energy sector is heavily regulated, so that even the slightest disruption leads to a cascade effect on different policies.

Web3 heralds significant changes in how we think about ownership and governance, and pushes new and innovative ideas. For example, the digitalisation of energy means connected devices could help balance the grid, rewarding customers that send excess energy back to the grid. Applying existing laws to the new web3 landscape has the potential to create a potential bottleneck that policymakers must address.

Token management and the EU’s General Data Protection Regulation (GDPR) compliance are other examples of foreseeable regulatory issues. Blockchain technologies are immutable by construction, contravening the “right to be forgotten”, or the right to have personal data erased in certain circumstances. Lawmakers will need to amend the right of deletion from decentralised IT architectures in favour of a right to sufficient protective measures.

Similarly, many existing data-protection principles are incompatible with decentralised data storage and management. For example, the rise of the prosumer may require an update to existing laws on licensing and IT requirements for energy suppliers.

Executing energy transactions in web3 means venturing into uncharted territory. Regulation can either step up to the challenge or fall behind, posing considerable risks because the current energy ecosystem is highly centralised, whereas web3 is not.

Governments should carefully update energy regulations to allow web3 to flourish while addressing areas where existing laws are no longer appropriate. The goal must be to protect customers by keeping prices affordable while ensuring energy security and promoting the shift towards low-carbon energy. Specifically, policymakers should:

• Assess: They should proactively seek to understand the impact of new technologies on the traditional energy ecosystem and the implications of web3. Devices like smart meters will find new uses, and it is difficult to predict the security hazards and loopholes of the future. Many intermediaries, for example, would become obsolete. Therefore, a robust long-term assessment of security, privacy and other salient issues is essential.

• Mitigate: Blockchain technology’s security, privacy and energy-consumption concerns may hinder its deployment. Policymakers need to promote newer iterations of DLTs or different consensus mechanisms that use less energy and can support the TPS required to manage intelligent devices on the energy grid.

• Incentivise: Web3 technologies will need to be promoted in a manner that ensures effective deployment in the energy industry. Policymakers should look to foster the creation of new energy business models to harness the power of web3. Policymakers must also understand the technology landscape and the innovative solutions available to ensure different web3 technologies are compatible.

• Collaborate: Government-brokered collaboration between energy companies, tech providers and other members of the web3 ecosystem is required to unlock the technology's full potential for the sector. Organisations can have different objectives but need to agree on a shared vision and be open to sharing their data to create a new, collaborative business model. Data-sharing standards, protocol development and performance benchmarks are some of the areas where greater government-supported collaboration will make a positive impact.

Policymakers in low- and middle-income countries (LMICs) must also work to maximise web3 opportunities. Web3 can catalyse off-grid energy transactions in these countries, which is especially important for addressing energy poverty and closing gaps in energy access. LMIC governments must enable web3 rollout by harnessing the boom in mobile and internet connectivity and the growing infrastructure for digital transactions.

Web3 brings together a cluster of technologies that will shape our future, and it will change the way we interact and how we exchange energy-related services. It can transform our energy ecosystems and accelerate our net-zero goals. Now is time for policymakers to firm up the approach to maximising the benefits and mitigating the risks of web3 in the changing world of energy.

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