The idea of using blockchain technology to ease trading in the energy and commodities markets is cropping up more and more.
Famously, blockchain is the technology behind cryptocurrency Bitcoin. Blockchains can be public, as with Bitcoin, or private, such as a group of traders.
The individual participant receives an online wallet that can be charged up with a digital currency. The individual can then transact with other members registered to the blockchain.
The blockchain's network of registered computers continually validate transactions, building blocks of transactions that are then permanently entered in the ledger.
Related event: Platts Digital Commodities Summit
Nobody can change the ledger; it is immutable. It is shared with all members at all times. It is not stored in one central place, reducing the risk of cybercrime. Since transactions are cleared instantaneously using the chosen digital currency, there is no settlement risk.
Click to view a larger version of the infographic about how blockchains work.
Companies in a variety of sectors, such as finance, see huge potential in blockchain technology. Energy firms are no different. The technology is now being put to work in a variety of experimental applications, both large and small.
One example is the Brooklyn Microgrid, a local peer-to-peer energy market that began in April 2016. The microgrid allows a small number of consumers to buy and sell domestic solar power directly to each other.
Smart meters are used to record the level of energy produced, with transactions carried out through smart contracts using the Ethereum blockchain platform.
Users are still connected to Con Edison’s traditional grid, but if they are disconnected in a storm, for instance, they still receive local power from the microgrid, which can operate under temporary standalone status.
The company behind the Brooklyn blockchain, LO3 Energy, has partnered with Siemens Digital Grid to develop blockchain-based local energy trading on microgrids.
Siemens argues this offers benefits in reduced costs for participants, and benefits in grid optimization for utilities.
More recently, on May 29, Platts Power in Europe reported that more than 20 European energy trading firms had joined forces to develop peer-to-peer wholesale energy trading using blockchain.
Trading is to take place on the Enerchain framework – a blockchain application developed by Ponton and used in November last year to execute the first European electricity trade using the digital ledger technology.
The trader group—which includes giants such as RWE and Total—has committed to share the costs of a full-scale prototype, which will be integrated into participants’ existing infrastructure. This would support “a decentralized credit limit solution required for bilateral trading,” Ponton said.
A broad range of traded natural gas and power products are to be tested, including forward trades, spot trades, load curves and more exotic trades, all with physical delivery across regional markets. Timeframes will range from day-ahead to monthly, quarterly and yearly.
The plan is for testing to take place until the end of 2017, with live trading due to start in the fourth quarter.
“The potential of blockchain technology lies in disintermediation,” said Thorsten Kühnel of E.ON, which is involved in the project. “This creates true disruption; everything else is incremental innovation or optimization. Enerchain is one of the very rare projects outside the financial sector, which has real potential for disruption.”
In a recent paper on the potential of blockchain in energy markets, published as part of a 2016 book, Blockchain technology: Introduction for business and IT managers, Ponton founder Michael Merz imagines a conversation between two ladies in a tennis club in 2030.
Sitting at the café, the two reflect on the merits of the automated trading strategies they used to sell their excess power during the last week.
Given the hot, sunny weather, one reveals that she is considering buying additional solar panels and a second battery for her home, as it “really would be worth it.”
Such a future will not be universally welcomed by the energy market’s more established participants. But, as the latest experiments show, it may not be all that far away.
Additional reporting by Mark Pengelly.