Andrew Lockley – Exponential Investor (United Kingdom) –
How do you know when an idea or concept starts the move from the fringes into the mainstream?
In my previous profession, journalism, one way to gauge this was by monitoring your inbox.
Specifically, the press releases emailed from companies and PR agencies that converge on the same topic, which stop being received every now and again and start hitting journalists’ inboxes in something of a torrent.
That shift, for one subject in the energy industry, has certainly started.
I still keep an eye on the newswires and am still signed up to receive all the same press releases and notifications that I was sent back when I was an energy market reporter and analyst.
Since I returned to work after the festive period, my inbox has been the recipient of more and more emails that all point to the same thing: that blockchain technology is going to disrupt the energy markets right across the value chain, from producers to consumers and via distribution and trading.
In the last few days alone, I have received news that several of Europe’s major gas traders, including Eni, Total and Gazprom, have joined startup technology firm BTL’s project for the use of blockchain in energy trading; that Japan’s biggest utility, Tepco, has invested in UK energy blockchain firm Electron to explore solutions to usher in a decentralised blockchain platform for energy transactions; that WePower, a blockchain-based energy trading platform, has signed a memorandum of understanding (MoU) to work with an Estonian retail utility to explore using blockchain for the cross-border sale of retail energy in Europe; and that oil and gas producer Iron Bridge Resources has launched a cryptocurrency mining and hosting operation at Canadian oil and gas field sites, enabling it to generate its own electricity.
There were more, too
Companies across the gamut of the energy industry are hopping on board –apologies in advance for the pun – the block-train before it leaves the station.
They’re joining the new blockchain-based energy hopefuls cropping up with increasing regularity, including some very exciting firms that have already started to make lines in recent months.
It’s increasingly clear 2018 will see significant steps towards an energy revolution that will fundamentally change the way people buy, sell, consume and distribute energy.
This decentralised digital platform – blockchain – will streamline oil, gas and power trading and physical tracking, and reduce risk.
In practical terms, blockchain will eliminate the need for all manner of paper documents – letters of credit, bills of lading and inventory receipts – by moving to a digital equivalent, potentially saving billions of dollars for firms across the supply chain.
The origins of the chain
Originally used to support the currency bitcoin, blockchain chronologically records and links every transaction made across networks, making such deals secure and decentralised via encryption technology – properties that will certainly facilitate energy trading transactions.
By making a trading chain fully transparent, blockchain is able to verify transactions and reduce counterparty risk without the need of a broker or clearing house, enabling participants to save on market access and transaction fees via an automated system.
In fact, without the need of an intermediary, the role of the energy trader, broker or clearing house may be bypassed entirely as suppliers can connect directly with end-users.
That won’t happen this year, of course – it will probably take another five to ten years before the transaction technology fully disrupts how power and fuel products are traded – but blockchain technology could start to make inroads into power markets in 2018.
We’ve already seen utilities trade blockchain
Last year, European utilities Eon and Enel used the technology to trade electricity for the very first time, enabling them to make quick transactions and cut costs by eliminating a central intermediary.
Eon said the cost reductions associated with the blockchain technology “will benefit energy customers in the future”.
The two utilities are among 33 European firms taking part in the testing of the peer-to-peer trading tool to assess whether the technology can deliver greater efficiency and lower costs through the so-called “Enerchain” initiative, a blockchain-based application developed out of Germany.
It is one of several projects exploring the opportunities for using blockchain-based technology in the energy sector.
Indeed, firms across the spectrum of the industry are engaged in tests as I write.
A consortium including oil companies BP, Royal Dutch Shell and Statoil, trading houses Guvnor Group, Mercuria Energy Group and Koch Supply & Trading, and banks ABN Amro, ING and Societe Generale will develop a blockchain-based digital platform for energy commodities trading expected to start by end-2018, pending regulatory approvals.
Also, last year Mercuria – in partnership with fellow blockchain consortium members ING and Societe Generale – used blockchain on a single oil transaction to test its real world application, shipping a consignment from Africa to China, selling it to a Chinese chemical company.
Mercuria has estimated that costs in terms of payments could slide by 30% by using the technology.
And there’s more coming
Just last month, US firm LO3 Energy and Paris-based power exchange Epex Spot pledged to look at ways to connect local micro grids to the wholesale market using blockchain technology.
The companies will launch pilot projects in Europe, deploying LO3 technology in community peer-to-peer micro grids which will connect to the Epex Spot wholesale markets.
This will mean any owners of solar power units can feed excess electricity from their panels back into the grid and consumers can purchase shortfalls at a market price.
The technology can allow millions of energy devices such as water heaters, electric vehicles, batteries and solar installations to transact with each other at the distribution level. It can also provide support to utilities and grid operators to integrate more utility-scale variable renewable energy capacity at much lower cost.
The CEO and founder of LO3, Lawrence Orsini, has described blockchain as “one of the most disruptive applications of technologies in the power markets”.
He expects to see “a functional local market by mid-2018”, and a connection with Epex Spot markets by the last quarter of this year.
In October, the company – which has already developed a blockchain-based microgrid in Brooklyn, New York, which effectively enables neighbours to trade electricity – teamed up with south German utility AÜW to set up a blockchain-based, peer-to-peer energy trading system to begin in the first quarter of 2018.
Although this is happening on the micro grid level, companies are aiming to facilitate trading on a much larger scale.
The technology has massive potential in large power plants as it’s able to match buyer and seller directly in a digital system.
In fact, of all the industries set to be disrupted by blockchain, energy is perhaps the most ripe for change, with inefficiencies abounding across every part of the industry’s value chain, including when consumers try to switch suppliers or charge their electric vehicles, and those times of peak demand when large energy users are forced to cut consumption.
Tomorrow I’ll discuss where we’re likely to see blockchain breakthrough first as well as address some of the current barriers the technology is facing that energy insiders are working hard to address.
Associate Publisher, Southbank Investment Research