The global need for energy is predicted to double by 2035 and the world needs innovative ideas for distribution and financing to meet this demand. Energy demand is one of the biggest issues and largest costs industrial and manufacturing companies face each year, but developing regions have a hard time providing reliable electricity to residents and businesses far from the few power grids available.
ARG is an energy provider that uses blockchain to manage renewable energy grids in emerging- and frontier-market countries, as well as help transfer angel financing for such projects. The company is developing a secure power smart-grid system built on an advanced blockchain backbone and digital ledger technology. The systems deliver low-cost, renewable energy, with back-up systems for natural gas co-generation and advanced battery storage. The company is also building ultra-low emission refineries, which will reduce emissions in energy production by 50 percent.
REM talked to Director of Development at ARG Michael Lumbley to find out more.
Can you tell me more about your company and what it does
Alternative Resource Group, the parent company, is a clean energy development group. We focus on solar, clean energy, natural gas, energy storage, but we also do have in our leadership team, a natural gas and traditional resource developer, Gene Dennis, who has been doing oil and gas development in Mexico for almost forty years now. So, we cover a large spectrum, but for our power generation, we focus on a majority of solar and natural gas with battery storage.
What is blockchain?
That description can get extremely granular. For readers and laymen, what I usually start with is, blockchain is a distributed ledger technology. What that means is, you do not have one single database where all your information is stored. The distributed ledger means that pieces, or copies, are distributed on multiple nodes throughout the network. Much like the internet in that sense. Like the internet, if one major hub goes down, the rest of the internet will be fine, because the information is not stored in one single location.
This has a number of benefits. One, there is safety in the redundancy. Two, the security and transparency is very, very strong, because there is no one single copy that someone can alter for some nefarious purpose or through some fraudulent activity, because if someone does alter something on a blockchain ledger, all the other distributed ledgers won’t match. The outlier gets isolated and contained and essentially blocked out of the system. Immediately, with that one example, if I can tie this back to one of the many advantages for energy, it essentially allows the entire network to validate all transactions and prevent a single bad actor from breaking into a system and implementing a bad transaction or a bad instruction. They would immediately identify themselves as the bad actor and that triggers a course of action.
What is the specific issue that is motivating you to use blockchain in this instance? In emerging markets?
The answer is multi-faceted. My former chairman of my advisory board was actually the former director of the CIA. He would go and do talks and, in my opinion, one of the most chilling things I ever heard him say was they would get the updates on the fifteen critical infrastructures, on a weekly basis, with the administration, and one of them was energy. The other fourteen ran on energy. So essentially, you really did have this one ‘Achilles Heel’ for all critical infrastructures because everything runs on grid power. The security aspect is paramount when operating a grid. With the functionality I just touched on with blockchain, that ensures a level of transparency and a level of security that is active.
To give you a good example of the how and why on the security side, it’s much like the Stuxnet bug that was put in Iran and essentially destroyed the centrifuges in their nuclear programme. All that was done by exploiting a Siemens protocol, which are absolutely standard across the globe. All these systems are created by Siemens and operate on Siemens protocols and every grid operator, generation asset operator, understands how to write and modify these protocols. They’re very simple, very widely known, and they are easily corrupted, as the corruption of the Iranian centrifuges shows, you can do some pretty serious damage with just a few small instructions. The advantage to bringing the Blockchain system to microgrid operations is that it has a definitive level of security and accountability but there’s also some functionality whereby you can encrypt and lock instructions with the key from appropriate actors, so that they can communicate openly and very, very quickly, but anyone trying to break in is going to have a bit of a serious issue.
At a larger scale ambition for our project, we have this contained environment whereby we can develop the equivalent of an ERCOT (the Electrical Reliability Council of Texas). ERCOT not only operates the grid in Texas, it also operates as an energy exchange, so the generators that generate the electricity and the power brokers and the end users can buy and sell and trade power, much like the New York Stock Exchange with all the standard market exchange operations. What we have the ability to do is roll out our solution on our systems and then, as we move up to larger systems, because we do have some larger microgrid projects that we’re developing, so we can graduate up in scale and the ambition is essentially to operate a blockchain-based energy transaction system where we could execute transactions globally. That’s the grander ambition, because the energy market globally trades in surplus of a trillion dollars annually, so when we get to numbers like that, if you’ve got the ability to securely and transparently transact energy around the globe, catching a percentage of a percentage is a monumental revenue stream.
Which areas of the world are we talking about here?
Currently we’re working on development throughout Latin America. We have conversations around natural gas solutions in Belize. We have multiple projects that we’re working on in Mexico. And we have a conversation that we’re developing, around helping support natural gas and energy storage solutions in Puerto Rico. All of those, obviously, contained in the Latin American market. India is a huge emerging market with enormous potential. You have enormous coal-based systems trying to deliver power to densely populated regions and there’s enormous potential to locate much smaller generation assets, much closer to the load centres. Plus in those areas, the real cause of consternation is the peak hours in the day. Because of the ever-growing middle class, they’ve all got window units and are switching them on and there’s an incredible new demand that was not really designed for in the capacity of the original systems. So when those systems come online in the middle of the afternoon, the grid can frequently crash and there are blackouts all the time. That is a good potential market but we have also had outreach in the past two weeks, from a group in South Africa that is also interested in discussing microgrid solutions. The Alliance for Rural Outreach in the Philippines has also reached out to us.
When we made the press release about having the ability to go in with highly targeted, highly efficient assets in emerging markets, we got a great influx of interest from emerging markets around the world.
Can you explain what ‘Angel Financing’ is?
The other side of what we’re doing beyond the blockchain operating system is the tokenisation of our clean energy product development fund. What I mean by that is that you have all these cryptocurrencies that are traded as utility tokens, however late last year, towards the end of 2017, the emergence of what is called a ‘security token’ started as a conversation about how to monetise existing assets and develop funding and financing of real-world assets. Securities. Which, just as they sound, are percentage ownership of a real-world asset. You’re not trading a speculative currency, looking for market highs and lows as such, you’re actually investing in an underlying asset. The tokenisation allows you to offer that investment opportunity to a much larger class of investors than we traditionally deal with in the energy space.
The reason we started looking for that was twofold. One, in an emerging market, traditional financiers will charge you 150 percent to 200 percent of the standard interest rate that you would see for other projects. So, instead of paying 7-8 percent on all of the debt on a project, we’re getting financing, but they want 12 percent, even 15 percent. At that point, because we’re dealing with very well known entities, for example the project in Mexico, is Fortune 500 subsidiaries for major auto manufacturers in the United States that are literally just 15 miles across the border into Mexico. So our financiers were, like, well it’s Mexico, so we need to charge 12.8 percent. We were astonished. What is the reason behind that? You’re looking at, over the term of the loan, an additional $15 million+. They said, well, it’s a dangerous market from our perspective they’ve got a straight line of sight through to the parent company, a Fortune 50, US-based company, but they just shrug and say “Yeah well, what are you going to do?”. So we stopped and looked around the landscape and said “Well we need to develop our own funding and be our own bank” So that was an exciting opportunity because, by lowering the cost structure, without that added finance cost, that allowed us to offer a much lower price to the end user for the energy produced. Number 2, and what we think is a much better opportunity, as the growing awareness, globally, of the impact of climate change, and the disappointment, to use the nicest term possible, here in the states, because the Administration pulled out, but supporting the growth of clean energy is the fastest, most effective way to help mitigate climate change. Energy demand is going to grow as the population grows.
We’re set by 2050 to have a 24 to 28 percent growth in energy demand globally. The only way to meet demand and, to the best of our ability, mitigate climate change is to clean up the energy supply. So what we’re doing is we’re offering people the opportunity to invest in the improvement and opportunity to effect the change in the world that they want to see. And it’s also opening up the opportunity for those same people to have a line of sight to investment in an asset class that’s just never been available to them. It opens up a new investment class for everyday people around the world and gives them an opportunity to be a part of changing the energy matrix.
The smart grid system that you’re building, what kind of technology is that based on?
It’s a technology stack of solar, natural gas and battery technology, so what we’ll be doing is using the natural gas to create a baseload system, to supply on-demand power. We will also have the ongoing generation from solar. Any surpluses that are created during operating hours are going to be fed into the battery system and that backup storage will be there during constraints on larger grid systems, because although we will be operating these systems in our microgrid, these facilities will also be connected to the larger grid.
Have you got any particular targets in mind with regard to greenhouse gas reduction and cost reduction?
Just because of the nature of the energy business, we always said that we just want to be an energy. When you are in energy, you are a commodity, no-one cares about who you are, or why you chose the fuel you did, it’s a race to the bottom. That is essentially where we are. As in commodities, it is a price-driven game. We are targeting a 50 percent reduction from retail pricing and emissions, in all of our markets. In emerging markets all the assets of energy transmission and energy production are either very old and in great need of upgrades or are non-existent. So, there are always high costs in emerging markets. So what that allows us to do is to bring our finance model into those markets with a target of delivering out power at 50 percent of the current market cost. Beyond that, our goal is also to reduce emissions from what has traditionally been from that amount of power, also by 50 percent. For the majority of our projects we use strictly solar plus storage. When we have a need for on-demand power, we realise natural gas is not a renewable resource, however, we use combined cycle systems that take the waste heat, the exhaust from the turbines running the generator and that feeds into it a secondary steam generator and that creates a secondary generating resource, a combined cycle. By combining the solar and the heat recapture on the natural gas portion of the generation we use far below what a traditional coal-based generation asset or a straight natural gas single cycle would look like.
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