Shell Invests In Ethereum Hybrid That Gives Real Power To The People

Michael del Castillo

July 10, 2019

Shell Oil is continuing its exploration of blockchain with yet another investment in the technology first made popular by bitcoin.

The fifth-largest oil and gas company in the world, valued at $262 billion, is investing an undisclosed amount in LO3, a New York startup using a modified version of the ethereum blockchain to make it easier for individuals to buy and sell locally produced energy using the existing network of power cables.

While the bitcoin blockchain lets users track the flow of value without the need of banks to audit the system, LO3’s platform, called Exergy, is designed to track the flow of energy as it is added to a shared, local energy network, giving the neighbors who purchase the energy absolute certainty it really came from a windmill, a solar panel or a gerbil running on a treadmill.

If successful, LO3 and its competitors in the nascent “transactive energy” market, could change the role of traditional electricity transmission and distribution companies like Con Edison in the United States and Western Power Distribution in England from mere installers of underground cables, to managers of more efficient, distributed local energy grids.

“We see that it’s society’s ambition to live in a lower-carbon environment,” says Shell Ventures investment director Kirk Coburn. “LO3 is a platform that enables that.”

The investment announced today is part of a larger bridge investment round also joined by Sumitomo Corporation Group based in Japan. Details of the investment are not being disclosed, though Coburn says he’ll be joining LO3 as a board observer as part of the round and could come on as a full board member pending possible future investments. 

Earlier plans to raise capital by selling tokens to be used on the platform via an initial coin offering (ICO) have been put on hold. However, the tokens, called XRG, are still expected to play a crucial role in the platform when it goes live in 2020. The tokens will be used to incentivize use of the platform and will be required to access the distributed energy grid. Shell has the option to convert its investment into XRG tokens at the time of launch. Another token, called anergy, is being designed to let consumers sell data about their energy usage to third-party companies at a later date.

The company is currently building Exergy on the public ethereum blockchain and will likely issues its tokens accordingly. However, Exergy is being designed to allow easy integration with a competing blockchain, called EOS, which has its own cryptocurrency and also allows for the creation of new tokens, but is touted as supporting larger transaction volumes. “We are building a custom blockchain combining the best of what existing blockchain communities have already accomplished,” says LO3 director Ben Conte. 

LO3 now employs 35 people, with most of its engineers joining Conte in Portland, Oregon, and other staff in Australia and Tokyo. The company plans to spend the investment to prepare for its full launch next year. When the project emerges from its beta testing, users will be able to set preferences on a mobile app, choosing how and when to use the local energy resources and exactly which sources to purchase from. Because a blockchain is really just a shared, transparent ledger of transactions without the need of a middle man to audit it, users will have increased certainty the energy actually came from the source they selected.

This is Shell’s fourth public investment in blockchain, with other portfolio companies including oil-trading platform Vakt, on which Shell began trading in 2018; Applied Blockchain, which built a derivatives platform Shell also began testing last year; and commodities platform Komgo, built on the public ethereum blockchain. Competitors using blockchain to track energy credits include Power Ledger, which uses the public ethereum blockchain, and Veridium, which uses the stellar blockchain with support from inaugural Forbes Blockchain 50 list member, IBM.

Currently, most energy consumers have very little choice in where their energy comes from and are limited to the companies that installed the actual power cables and other infrastructure in their area. When an individual seeks an environmentally friendly alternative, their best option is often to buy a renewable energy certificate (REC) that goes towards supporting environmentally friendly energy production. However, there’s little guarantee the energy consumed is sourced from local plants, which would result in a positive impact on the purchaser’s community.

So in 2016, LO3 conducted one of the first experiments using its technology to let a neighbor on the sunnier side of a street in Brooklyn sell solar energy he generated to a neighbor on the opposite, shadier side of the street. While the demo has not yet been widely scaled, it showed how a blockchain-based accounting system could form the building block of a more nuanced, competitive and locally sourced energy economy.

Since then, LO3 has raised capital from Braemar Energy Ventures in New York, Centrica energy in the United Kingdom and Munich-based Siemens (also a member of the Forbes Blockchain 50 list). Coburn joined Shell in 2017 and says he was impressed with LO3’s ability to gain support across different jurisdictions beholden to a wide range of regulatory oversight.

“It’s more complicated than just trading from the neighbor on one side of the street to the other. How do those two neighbors work within a neighborhood? How do they work within a larger environment?” says Coburn. “From a Shell perspective, what we see is we want to be able to enable customers to take advantage of that.”

When expanded to a larger scale, Coburn hopes the LO3 platform will generate a self-contained energy market where local energy producers can connect directly with their neighbors. These early stage markets, which are now also being tested in the U.K., Colombia, Japan and Australia, could then create new revenue for locals and incentivize more energy efficient purchases by giving consumers increased certainty that their hard-earned money is having a direct impact on the air they breathe.

“If I’m buying a REC from a plant in Montana and I live in New York, I don’t breath air from Montana, I breathe air from New York,” says LO3 founder and CEO Lawrence Orsini."“I’d much rather pay for the clean air in New York and not the clean air in Montana.”

Between 2010 and 2016 renewable energy use increased by 67% in the United States, according to the Center for Global Climate & Energy Solutions. But as of last year, only 11% of U.S. energy came from renewable resources, according to the U.S. Energy Information Association. To accelerate that rate several U.S. companies, including Apple and Bank of America, have joined the RE100, an international group of 185 enterprises committed to moving to 100% renewable energy by 2050 at the latest.

To meet that demand those enterprise consumers and others won’t be able to rely on energy provided from traditional power companies alone, for many reasons, according to Orsini. The most important reason is that the centralized nature of traditional coal and gas means the raw materials have to be transported over great distances, resulting in both extra cost to ship the raw materials and lost energy as electricity dissipates from cables used to transmit it.

“You can’t buy green energy from the other side of the planet and expect to get green energy in your plant,” says Orsini. “So as this market evolves and develops, and as people start pushing more and more to renewables, they’re going to have to start buying closer to them to really start verifying that they’re consuming renewable energy. Otherwise, it’s all just a bit of accounting chicanery.”