A Future Of Energy Abundance – Bitcoin Magazine
This is an opinion editorial by Austin Mitchell, co-founder and CEO of Synota.
A disconnected industry
Energy is the lifeblood of humanity. Modern society is built on cheap, abundant energy. Current economic, political and humanitarian crises show how energy affects everything we do, how we live and how we envision the future. However, energy prices continue to rise, reports of shortages spread in the media and almost a billion people worldwide live without access to electricity. Prosperity requires access to energy and equity. We must create an abundant energy future for everyone.
My career spans the entire gas and electricity value chain in the US. When I use energy in my home—to cook, keep warm, or retrieve bitcoin—I know where it comes from and understand how it was priced. When I pay my electricity bills, the money will flow through several companies involved in energy production and distribution. This payment chain is settled months after I consume the energy, and the cost of that delay is reflected in the price. This has a negative impact on my wallet, but the cost of this delay also symbolizes a massive inefficiency within the energy industry that distorts the value of energy and stifles innovation.
My interest in understanding the energy industry began as a student at the University of Dayton, when I participated in an applied research project that analyzed household energy consumption to help homeowners reduce energy costs. I earned a PhD studying the intersection of energy, economics, environment, and policy at Carnegie Mellon, and then led a comprehensive study of methane emissions in the natural gas industry as part of a postdoc with the Environmental Defense Fund.
I have spent the last eight years learning the ins-and-outs of the USenergy industry from the perspectives of a producer, utility and retailer. My roles provided a unique opportunity to truly understand the energy value chain. When I managed the business side of energy, I witnessed the enormous disconnect between the two sides of an energy transaction – physical and financial. Physical energy systems, the molecules and electrons that move down the value chain to the consumer, are increasingly dynamic and rapidly decentralising. Energy financing processes, movement of money up the value chain from the consumer, remain stuck in the days of analog gauges and vertically integrated tools.
For example, the United States has invested billions of dollars since 2009 to roll out nearly 125 million smart meters. These meters provide real-time consumption data to the supplier, which should enable advantageous pricing and billing options for customers. However, less than 3% of smart meters are being used to provide these and other benefits the utilities promised their customers, according to a September analysis by the Mission: Data Coalition. They are simply unable to effectively process or use all of this data due to outdated, centralized systems.
In the US, about 10% of the energy price can be attributed to costs other than energy production and distribution, including but not limited to financial intermediary fees, overhead costs and chain payment processes. These economic inefficiencies increase the price of energy without adding any value.
The price impact of financial inefficiency is compounded by cash backlogs and credit risk. Cash backlogs are due to a reliance on credit-based transactions throughout the energy economy. Cash backlogs force companies to engage in costly practices to manage cash flow imbalances and credit exposure. In a system where consumers pay for energy consumed months in advance, suppliers must borrow money to finance operations during peak consumption, and consumers must provide collateral to prove creditworthiness. In cases where the cash never arrives, it is converted to bad debt. Today, according to McKinsey and Company, “many utilities have become accustomed to bad debt rates of 5-7% and simply set their prices accordingly, accepting the situation rather than trying to improve it.”
It is quite obvious that the disconnect between the physical and economic side sucks time, money and resources from industry, distorts the true value of energy and stifles innovation. After an inspiring and educational week at Bitcoin Miami 2021, I saw the disruption needed to revolutionize the energy industry and create abundant energy for all. What Bitcoin does for financial inclusion, the Bitcoin protocol and the Lightning Network can do for energy equity and access.
A transparent energy economy
To unlock the true value of energy, money and information must flow at the speed of energy. Bitcoin and Lightning are the only networks in the world that can do this efficiently and securely. The energy economy of the future will be decided on the grid. Every home, business, substation, solar farm – wherever energy is produced, distributed or consumed – will be programmatically connected to a node on the Lightning Network. Instant settlement on the Lightning Network reduces or eliminates financial inefficiencies, cash backlogs and credit risk.
Revolutionizing the energy industry by decentralizing consumption data and enabling peer-to-peer payment realigns the financial side of energy transactions with the gas and electricity grid today. This adjustment resolves the disconnect, but also provides the flexibility required to keep pace with changes in energy production and distribution. A decentralized settlement process enables simultaneous multi-party payments, multiple integrations with energy hardware and software solutions, variable payment frequency and value-for-value transactions. Inherent to this disruption is removing the barriers to energy transactions and allowing parties to create agreements with terms that maximize economic benefits and reflect the actual circumstances of this complex industry.
This future is now one where we actually leverage the real-time capabilities of smart meters and Internet of Things (IoT) devices, because they are fully integrated as digital nodes on the Lightning Network. When money and information move in sync with energy, granular prices are established and the true value of energy is revealed. A transparent market will improve competition and stimulate dynamic pricing. Clear market signals create a smarter network and give consumers and suppliers the opportunity to make better decisions.
Using the Lightning Network to settle energy transactions instantly reduces energy costs and enables value-driven investments and distribution of energy resources worldwide. A more intelligent financial system will support more intelligent energy systems and markets which will ultimately improve energy equality and access for all.
Let’s get started
At a time when energy access and affordability are being challenged worldwide, it is the perfect time to leverage Bitcoin and the Lightning Network to revolutionize the energy industry. Synchronization of energy and cash flow ultimately enables the transition to renewable energy systems and provides a future where energy is available and affordable for all.
Bitcoin mining is the perfect industry to initiate this innovation. This industry sees value in stranded or wasted energy, when many try to cover it up. Where the old industry mindset seeks to limit demand to meet supply, miners see an innovative and inclusive future driven by growing demand. The bitcoin mining business model, with daily pool payouts, is perfectly aligned with the future state of energy finance. Bitcoin miners can achieve optimal transaction flexibility and efficiency by using the Lightning Network and paying for energy in Bitcoin. Bitcoin miners have a remarkably clear view of the economic value of energy. This puts them in a position to capture additional value by pairing dynamically priced supply with price responsive demand.
Energy financing is an important application area for Bitcoin and the Lightning Network. There is a huge opportunity to further prove that the technology will benefit everyone while bringing massive scale to the ecosystem. The Lightning Network will become the dominant payment network of the future, and I am excited to make it the backbone of the energy industry of the future. I am grateful to the Bitcoin community for lighting this fire. Synota now joins the fight for financial inclusion and the freedom to act by promoting the future of Bitcoin and creating an abundant energy future for all.
This is a guest post by Austin Mitchell. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
