By Samuel Diamond
A regular reader of financial publications might be thinking right about now, “Please, not another Bitcoin article!” Rest assured, this is not that. (Still, you might want to skip over the next paragraph.)
A crash course for the uninitiated: a blockchain is a continuously growing list, or chain, consisting of coded transaction records, or blocks, each of which is timestamped and also includes data from all of the previous transactions. In theory, this data should be incorruptible, meaning once it’s entered into the blockchain it cannot be altered. Also known as “distributed ledger technology,” blockchain can be thought of, more simply, as a recordkeeping tool that is by its very nature extremely resistant to hacking and tampering. To date, its most popular use is as a ledger for cryptocurrencies like Ethereum and, yes, Bitcoin. However, blockchain can provide a foundation for much more than cryptocurrency trades and purchases.
The energy market — with its many and varied fuel types, numerous and nuanced supply chains, and countless contract options available to consumers, retailers, distributors, wholesalers, and producers alike — offers ideal testing grounds for a range of new and innovative blockchain applications, some more practical and therefore closer within reach than others.
The following is a survey of three possible blockchain applications, each of which is in a different stage of development, but all of which could eventually have major implications for the downstream energy market and deliverable fuels industry.
P2P Power Trading
Blockchains typically operate as peer-to-peer (P2P) networks. Transactions take place between users on the network, with each trade creating a new block that is added to the chain. There is no central moderator, because with each block containing a coded record of every previous transaction, there’s no need for one.
Think of the effect such decentralization could have on the electricity market.
A recent article in Bloomberg Technology titled “How Blockchain Is Threatening to Kill the Traditional Utility” (!!!) outlines one possible scenario: “Imagine your neighbor with a solar panel directly selling you cheap power to charge your Tesla.” This might seem like an extreme example, but it speaks to the larger point that blockchain helps cut out the middleman.
As power generation becomes increasingly localized via the development of microgrids (hyper-local, often community-based electricity networks), some municipal utilities see in blockchain a means for getting assets like solar panels, batteries, and wind turbines to work together more efficiently. In Burlington, Vermont, for example, a blockchain software provider called Omega Grid is helping the municipality set up a system to manage the local electricity supply and demand in real time. As electricity prices rise, businesses on the microgrid might be able to automatically draw down their power demands.
Linking generators and users together like this could reduce the need for conventional infrastructure upgrades, such as new power stations and lines, a major source of revenue for electric companies. It’s no wonder then that more and more of these companies, including the biggest utility in Japan, have announced investments in blockchain-enabled “smart grid” technology; better to own and operate the disrupter than to be undone by it.
RECs & RINs
As you might have deduced by now, one of the core features of blockchain technology is that transparency is essentially hardwired into the system. Because blockchains represent open record books, there is little opportunity for fraud.
The markets for Renewable Energy Certificates (RECs) and Renewable Identification Numbers (RINs) have long been bogged down by concerns about fraudulent activity and a general lack of transparency. In October 2016, two owners of Indiana biofuel producer Triton Energy pleaded guilty to conspiracy, fraud and false statements after having claimed over $60 billion in tax credits and RIN credits on non-qualifying renewable fuel.
RIN fraud is one thing, but even in everyday transactions where absolutely no crime or wrongdoing has occurred, it is sometimes difficult for biofuel sellers and blenders to maintain the “chain of custody” necessary to claim the tax credits that play such an instrumental role in the renewable fuels industry.
Blockchain technology could be exactly what the market has been missing.
In a December 2017 interview published by GreenBiz, John Cretys, a managing director at the Rocky Mountain Institute, predicted that blockchain will soon be deployed “to help solve trust and integrity issues in markets managed by accounting intermediaries.” He specifically cited what he called the “‘certificate of origins’ market,” which he said includes “unbundled” RECs. “The current system is plagued by high transaction costs, data handoffs, lengthy settlement times and market opacity, all of which make it hard for buyers to get the attributes they want, and for generators to authenticate sales,” he said.
“These shortcomings can be remedied by a centralized blockchain ledger that incorporates creation, ownership transfer and retirement into a single, robust data system that is cheap to manage, easily accessible and cyber-secure,” Cretys claimed.
There has not yet been any widespread consideration given to replacing or supplementing RINs with a centralized blockchain system. However, as Congress continues to debate reforms to the Renewable Fuel Standard (RFS), as well as other ongoing issues like grid reliability and the transition to renewable energy, blockchain could soon enter the discussion.
We’ve already looked at a few of the ways blockchain could help streamline and secure smart grids and perhaps even “smart RINs.” But closer to the heart of the fuel industry, three petroleum majors are looking at how blockchain might help them transition from traditional paper trades to digital “smart contracts.”
In November 2017, the commodity trading company Gunvor launched a blockchain project backed by British Petroleum (BP), Royal Dutch Shell, and Statoil, with the aim of reducing trading costs while increasing the reliability and efficiency of back-office trading functions. At the launch announcement, Gunvor expressed its desire to open the blockchain platform to the entire commodities trading industry.
In April 2018, Eren Zekioglu, chief operations and IT officer at Gunvor, told Platts that the project had since generated enormous interest among banks, investors and other trading houses. “The commodities trading industry, which is known for being one of the most competitive in the world, has clearly sent us a message that it wishes to unite to move it forward,” he said.
Meanwhile, at least one of the project’s backers is also testing blockchain technology in-house. At a recent conference in London, BP Technology Director Julian Gray revealed that the company had completed “a proof of concepts using tokens internally, transferring value.” Details are sparse, but considering the speed at which this sector is evolving lately, it isn’t difficult to imagine one or more of the big oil companies rolling out an ICO [initial coin offering] for digital tokens that downstream businesses can use in fuel sourcing and procurement.
Delivery companies aren’t typically known as early adopters. However, in this hypothetical, the potential benefits — enhanced efficiency, security, trading transparency, and proof of ownership — might prove too much for anyone to overlook. And should that come to pass, residential heating oil and propane customers could see the day when their budget plans and price protection contracts are based in blockchain platforms.