European utilities Enel SpA and E.ON SE traded electricity over blockchain technology for the first time as part of a bigger effort by power companies in Europe to do more direct trading over a decentralized marketplace.
Enel, an Italian electricity distributor, and Germany-headquartered E.ON, traded 24 MWh within Enerchain, a peer-to-peer blockchain platform developed by German energy IT company Ponton, during an Oct. 4 presentation in Amsterdam, Ponton founder Michael Merz said. Some 33 European companies, including Vattenfall AB, Total SA and Statoil ASA, have each paid €20,000 to explore blockchain's application to energy trading in a pilot project and determine whether or not they need middle-man brokers after all.
"It's a decentralized technology. Whatever decentralized doesn't require a central platform, operator or player," Merz said. "Most energy markets are less liquid. If you look at exchanges and brokers who charge market access fees and transaction fees, it's an obstacle for smaller market participants to be part of the markets." Removing that third-party cost factor would help diminish costs, which would be then passed onto customers, Merz added.
Enel and E.ON agreed to integrate Enerchain into their energy transaction management systems and plan to agree on more products to trade over blockchain, Merz said. Representatives for Enel and E.ON did not respond to requests for comment on the details behind their blockchain trade, but E.ON's chief digital officer, Matthew Timms, said in said in a statement that Enerchain is a good example of "open, cross-industry collaboration."
Enerchain is now in its six-month proof of concept phase, when more participants will test the waters with blockchain, Merz said. Some companies participate to learn more about how blockchain works, while others want to build products and turn it into a long-term investment. Merz anticipates adding 10 to 15 more participants, adding that he has been in talks with a U.S. energy company with offices in New York.
"We all believe in the enormous potential that blockchain technology has for the new energy world and especially for our customers," he said.
Most of the popularity behind cryptocurrencies, particularly Bitcoin, stems from financial services. Utilities and power companies, on the other hand, have not jumped on the blockchain bandwagon. But Enel and E.ON will be the test cases for the energy sector, according to Travis Miller, an equity strategist in Morningstar Research Services' energy and utilities division who covers E.ON.
"We haven't seen much of any of this happening yet in the industry," he said in an interview. "There are compelling prospects of trading costs, which are a huge component of the ultimate price customers pay. That said, I'm sure regulators will want to make sure that there is sufficient oversight in the process."
A big regulatory question for European power companies is how blockchain will abide by Europe's regulatory framework, according to a PwC report on blockchain's potential effects on global utilities. Blockchain could have benefits for the European Union's Third Energy package, legislation on the EU's internal gas and electricity markets, and helping the EU give more control back to electricity customers. But in more stringent markets such as Germany, blockchain's implementation would put high stakes on a key part of its identity: that the physical data is safe and secure. And that would put a lot more pressure on meter operators.
"The European power system has some stiff regulatory oversight," Miller said. More likely than not, it will take some regulatory and legal development to spur others to use blockchain technology systems like Enerchain. "It's relatively easy to monitor an exchange trade product, whereas this might be less easy for regulators to monitor," he added.