Forecasting in blockchain-based local energy markets

Abstract

Increasingly volatile and distributed energy production challenges traditional mechanisms to manage grid loads and price energy. Local energy markets (LEMs) may be a response to those challenges as they can balance energy production and consumption locally and may lower energy costs for consumers. Blockchain-based LEMs provide a decentralized market to local energy consumer and prosumers. They implement a market mechanism in the form of a smart contract without the need for a central authority coordinating the market. Recently proposed blockchain-based LEMs use auction designs to match future demand and supply. Thus, such blockchain-based LEMs rely on accurate short-term forecasts of individual households’ energy consumption and production. Often, such accurate forecasts are simply assumed to be given. The present research tested this assumption by first evaluating the forecast accuracy achievable with state-of-the-art energy forecasting techniques for individual households and then, assessing the effect of prediction errors on market outcomes in three different supply scenarios. The evaluation showed that, although a LASSO regression model is capable of achieving reasonably low forecasting errors, the costly settlement of prediction errors can offset and even surpass the savings brought to consumers by a blockchain-based LEM. This shows that, due to prediction errors, participation in LEMs may be uneconomical for consumers, and thus, has to be taken into consideration for pricing mechanisms in blockchain-based LEMs.