Blockchain: German energy market overhaul unlikely, regulation stands in way

Regulation is the main obstacle facing the spread of blockchain trading in energy markets, according to experts.

Several projects have taken off recently that aim to make use of blockchain in the energy sector (see accompanying box).

A number of European energy companies, including German giants RWE and E.ON, are to test power and gas trading via blockchain by using Enerchain software under a project led by software firm Ponton ( see EDEM 30 May 2017 ).

This is despite experts pointing to some obstacles for such trade in the near term.

High technological expertise is needed to set up a blockchain-based trading system that meets regulatory and reliability requirements.

The motivation to set up such systems might be higher in countries where power trading via exchanges and brokers is less well-established than in Germany. “I don’t think blockchain will really revolutionise energy markets that are quite developed,” Gilbert Fridgen, expert at the blockchain research labour of the Fraunhofer institute said.

It is also yet to be proven that blockchain can cope with the pace of German power trading. The number of transactions that can be made in each second is limited under current blockchain technology. Experts do not see this as a major obstacle though, at least not in the longer term.

Marcel Munz, energy expert at PA Consulting, said that big utilities consider blockchain a side-project, and that they should be aiming to keep up with competitors once the technology becomes more widespread.

Obstacles

Blockchain is a way of verifying and recording transactions electronically in a decentralised database. It enables trading without a central marketplace operated by a third party such as an exchange or a broker and as a result can reduce transaction costs.

In principle, a participant would need only a computer with good internet connection to trade via blockchain. But financial and energy regulation, such as reporting obligations stemming from the EU’s regulation on energy market integrity and transparency (REMIT) that aim to prevent market manipulation, mean it is not that easy, Munz said.

For companies that already have systems set up for trading via exchanges and brokers, the effort and cost of migrating to blockchain might not make sense, he added.

Blockchain could be a good tool for smaller companies that do not have such systems in place, but it competes with recently emerged platforms that facilitate bilateral power trading such as E-Point. “This is more promising at the moment for trading than blockchain as it provides solutions for all regulation,” Munz said.

Some companies have also expressed concern about the reliability of blockchain due to the decentralised nature of its data storage, he said. This is even though, in principle, it should increase reliability as all data is not stored in one location.

Long-term potential

Wholesale power trading via blockchain is unlikely to gain a significant market share in Germany in the next couple of years, Munz said.

In the longer term, he added, blockchain might have the biggest impact by enabling power trade between individuals, for example by enabling a household with solar panels to sell its excess electricity to neighbours. Currently, regulations limit this potential.

Regulatory changes to facilitate blockchain in the power sector are not under discussion, but changes are likely to be made once the technology becomes more widespread, Munz said.

Norbert Schwieters, energy expert at PWC, shared this sentiment: “I would not expect considerable implications from this technology within the upcoming years and it will probably not cause an overhaul of the German power market design,” he said.

But, when it comes to new technologies, it is often overestimated how quickly they will have an impact while their long-term impact is underestimated, which could also be the case for blockchain, Schwieters said. laura.raus@icis.com

In search of blockchain solutions

There are several ongoing efforts to harness blockchain technology in addition to the trading project being led by software firm Ponton.

Start-up BTL plans to extend a pilot blockchain project into a gas trading platform by the end of this year ( see ESGM 10 April 2017 ).

In addition to trading, the ability to securely store and share data has wider potential applications for the energy sector.

US technology giant IBM has a handful of pilot projects in Europe. The company has a particular eye to use blockchain to facilitate batteries owned by domestic consumers in balancing activities.

There is a growing need to find flexibility in the system in response to the rise of renewable energy but this has so far been the preserve of large operators.

One project in collaboration with German grid operator TenneT should make the TSO the first to use blockchain to manage the electricity grid using solar batteries at people’s homes.

“At peak periods, energy is stored in domestic solar batteries so there is no need to stop wind plants and the energy can be consumed at home,” Leo Dijkstra, one of IBM’s European energy leads, told ICIS. “Households also get paid for providing this flexibility.”

Balancing is a particular issue in Germany where there is a dramatic mismatch caused by strong renewable supply in the north of the country and demand in the industrial south. This can result in loop flows of energy into Germany’s eastern neighbours, which is one of the biggest drivers of a potential split in the German-Austrian single power bidding zone.

“Before blockchain it was only possible to use large installations to provide flexibility,” said Dijkstra.

The blockchain ledger allows TenneT to see exactly what individual consumers have taken on board. “Blockchain brings down costs and makes it viable to use small-scale devices,” he said.

Cars, certificates and cryptocurrency

IBM’s second project hooks up electric batteries to provide balancing services. The initial project is based on Tesla cars but if successful it will be expanded to other electric vehicles.

Tesla owners will make the capacity of their car battery available to Dutch green energy supplier Vandebron. Blockchain allows Vandebron to see the availability of individual vehicles and record their participation in maintaining balance on the grid.

The project will be tested over the summer and they hope to go live in the autumn.

Thirdly, IBM is also looking at green certificates in the Netherlands. “Blockchain allows tagging of green power so it can be traced, for example, to the exact wind farm that produced it,” said Dijkstra.

“It would unlock green certificates for small-scale producers,” he said. This would allow a one-to-one trading environment between producers and parties that want to buy green certificates.

As well as unlocking the green certificate market for small-scale producers, this could challenge the need for recognised traders to facilitate the exchange.

Other blockchain applications include a project by Innogy – an offshoot of German utility RWE – to charge electric cars when payment is automatically made by the vehicle using a cyptocurrency.

Italian utility Enel has cast its net wide to find the best uses for the technology. The firm has launched a public competition to find the best blockchain project, as well as seeking to lead cooperation within the sector ( see EDEM 31 January 2017 ).

Outside of Europe, US start-up LO3 Energy is testing a micro-grid in the Brooklyn area of New York. The project – in association with German giant Siemens – allows participants to trade photovoltaic power across a blockchain platform. jon.stibbs@icis.com