Regulators trying to keep pace, but still slow in energy blockchain

It’s clear the future of blockchain-related energy trading applications will be shaped by the speed and degree to which these emerging tools are used in various energy markets.

Potential uses include anything needing secure data submission with adaptable privacy options and a clear audit trail. It could be particularly useful for complying with regulatory requirements to make market fundamentals — like inventory levels — more transparent while protecting commercial confidentiality.

{mosads}Most of the commercial blockchain activity with regard to energy in the U.S. has been occurring at the state level and that activity is most advanced along the coasts. Federal regulators would not say whether they have plans to regulate the space.

Nevertheless, regulations are important because blockchain sits between financial and energy markets — two of the most heavily-regulated industries.

Globally, one of the first live commercial applications in the energy sector is the S&P Global Platts blockchain project at the Port of Fujairah in the United Arab Emirates, which launched in February 2018.

Platts uses a permissioned blockchain to collect and publish weekly aggregated data on oil terminal stock levels on behalf of the Fujairah Oil Industry Zone authority and data committee FedCom.

The project shows how blockchain can be used to create networks for natural partners — like trusted trading counterparties, regulators and publishers — to securely share potentially confidential information. 

At the U.S. state level, one executive believes New York, Texas and California will be at the forefront of adopting blockchain-based energy trading.

LO3 Energy launched the Brooklyn Microgrid in 2016 in conjunction with Siemens, which is a project where local utility Con Edison maintains the grid, but the energy is generated, stored and traded locally at the peer-to-peer level. The program required a regulatory waiver. 

LO3 has been in conversations with regulators regarding rule changes that would allow them to transact smaller volumes of power than are currently allowed, according to LO3 CEO Lawrence Orsini. The company aims to monetize the value of locally produced clean energy. 

One challenge to reaching those goals is that regulators are not set up for peer-to-peer transactive energy business models. In most markets, only approved providers can sell power, and in retail-choice states like New York, you have to register to be an energy service company in order to do so. 

From the utility perspective, adopting new technologies like blockchain can be a challenge because they need to sell major innovative ideas first to their leadership, then explain them to regulators and ultimately get regulatory approval.

That time-consuming process must be undertaken while the underlying technology that sparked the initial innovation is often undergoing significant change and advancement. 

In April, U.K.-based-Centrica’s North America Business unit, Direct Energy Business, launched a micro-level energy hedging market for businesses in Texas that uses LO3’s technology.

That initiative makes it possible for large commercial and industrial companies to “automatically place orders for customized power hedges, as small as the hourly level,” that can be matched with competitive offers, according to a statement.

California has things going from a technology perspective, with Silicon Valley backing progressive energy technologies, but “policy just doesn’t seem to move as quickly as it could,” Orsini said. Other companies considering blockchain applications have made similar observations.

“We want to aggregate devices [for demand response] and could use smart contracts to verify identity without using a traditional contract,” Thomas Folker, CEO of Leap, said. Using the blockchain platform Ethereum could allow Leap to scale from hundreds of participants now to millions. 

Many regulators look favorably on blockchain. The California Air Resources Board has a low-carbon fuel credit program, but it’s challenging to track. Tokenization and digitalization of their credit register could improve what is currently a vague and inefficient market.

The road to widespread commercial use of blockchain to increase power and other commodity market efficiency is a classic example of technology outpacing regulation.

However, should blockchain’s energy-related applications live up to their hype and momentum for these services grow among energy providers and consumers, regulators will catch up as they have with other disruptive technologies throughout history. If markets develop, regulators will regulate them.

Jared Anderson is a senior editor for North America Power at S&P Global Platts.