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Blockchain is promising technology for energy transactions, but still in its early days

Blockchain is emerging as the next big thing in energy markets, where the technology can help reduce energy transaction costs and facilitate trading, but areas of regulatory friction and other challenges must be smoothed out first, experts said Thursday.

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Related blog post: Blockchain efforts look to improve trade execution, breakdown data silos

Blockchain is a distributed ledger technology that processes and stores transactions, with functionality "kind of like a Google Doc versus an MS Word document," Colleen Metelitsa, grid edge analyst with GTM Research, said at the company's Blockchain in Energy Forum 2018 conference that was webcast from New York City.

However, a Google Doc does not have the same security as blockchain, Metelitsa said, which adds to its attractiveness for transactive energy applications. Blockchain is more efficient, secure and traceable, she said.



Some of the aspects of the energy industry that make it ripe for blockchain adoption include the large number of intermediaries across the electricity value chain, slow financial settlement times and the increasing decentralization of the power grid.

One theme that crept up multiple times during the conference is the technical concepts that underpin blockchain are not new. The technology is a consortium of ideas that have been around for a long time, but are being put together in an innovative way.


SMART CONTRACTS ARE BEGINNING TO BE USED


Smart contracts are one area where blockchain is making early inroads into energy markets. Smart contracts enable agreement on future transactions using computer code, according to Metelitsa's presentation. The contracts are stored in a particular blockchain and self-execute when certain conditions are met.

For example, a company called Leap is using blockchain to facilitate transactions in the demand response marketplace. Instead of sending a signal directly to a device like an air conditioner, telling it to lower its load, they send a price signal to a smart contract that executes yes or no.

"I send you through our platform a signal that says 'please don't charge for the next hour and I'll pay you two dollars.' You either accept or not and load that into a smart contract," Thomas Folker, Leap's Co-Founder and CEO, said.

Two-thirds of the blockchain energy ecosystem is currently focused on Ethereum, Jesse Morris, a principal at think tank Rocky Mountain Institute, said. Ethereum is a decentralized platform that runs smart contracts.

It can currently handle 16 transactions per second and that can be pushed to 30, but widespread trading would require thousands of transactions per second to be processed, Morris said.


TRANSACTION COSTS REPRESENT A CHALLENGE AND AN OPPORTUNITY


Morris is working with a company that manages electric vehicle charging on an Ethereum-based platform, but its transaction costs are $3.00 to $5.00 every time a charging event starts. Those costs will come down over time, he said, but reducing them is a short-term challenge.

However, such costs could represent substantial savings in other value chains with higher transaction costs. For example, the renewable energy credits market is broad and has high transaction costs associated with broker fees, administrative costs, auditing and others. "So there is a lot of value to be captured by cutting those transaction costs," Alex Anich, renewable market intelligence manager at NRG Energy, said.


THE REGULATORY ENVIRONMENT COULD HINDER BLOCKCHAIN PROLIFERATION


Blockchain sits in middle of financial and energy regulations, which are two of the most heavily regulated industries, GTM's Metelitsa pointed out.

Regulators are not set up for peer-to-peer transactive energy business models, although this is a promising blockchain application. In most markets only one provider can sell you power and in retail-choice states like New York, you have to register to be an energy service company in order to do so.

"So is neighbor A and neighbor B going to do that, probably not," Benjamin Tejblum, an associate at law firm K&L Gates, said. Neighbors can't trade feely with one another without utility involvement, he said.

Metelitsa suggested some important questions regarding blockchain energy applications that must be resolved:

**Business models -- How do platforms and applications make money? Are they the new middlemen?

**Security - Who owns the customer data, and who can access it?

**Interoperability - How does blockchain interact with legacy utility systems? Can blockchains interact?

-- Jared Anderson, jared.anderson@spglobal.com
-- Edited by Rocco Canonica, newsdesk@spglobal.com