Bitcoin surely wins the “hype” award for 2017. Towards the end of the year, market sentiment had driven the cryptocurrency to staggering highs. Recent falls have been observed and this is a bubble that could well burst in 2018. Nevertheless, the underpinning technology, Blockchain, (or Distributed Ledger Technology (DLT)) could yet prove to be transformative in many industries.
Financial Markets have made the biggest advancements to date, in exploring how DLT solutions can drive more timely and lower cost transaction processing. Many banks, supported by tech firms have created consortia looking to define new payments infrastructure amongst other use cases. There is certainly a strong imperative in financial markets given that large transaction volumes exist with intermediation fees that DLT solutions can help to remove. The underlying simplicity of many financial transactions lend themselves well to distributed ledger processing. Fulfilment typically just requires the electronic posting of cash between accounts, contrasting with energy market fulfilment that usually requires the physical delivery of a product (e.g. electrons or a barrel of oil) and the need to track and measure that event.
Before we consider the use cases for DLT solutions in the energy markets, let us first consider the potential benefits:
Rapid consensus and validity
- A DLT contains a distributed record of the truth held by each node avoiding the need for reconciliations between market participants and central records
- Regulators can operate a node of the ledger covering the requirements for reporting of transaction activity
- Additional to transactions, distributed ledgers could hold details of infrastructure asset state.
Immutability and authentication
- It is hard to defraud a distributed system and to create a rogue transaction or to tamper with historic transactions as all nodes need to be compromised creating trust.
- New infrastructure for transaction fulfilment can be co-developed where processes are non-proprietary and representative of standard market rules.
- Rapid fulfilment of a process involving workflow across multiple parties through smart contracts
- Shorter fulfilment cycles (from transaction execution to cash posting) can help to reduce credit exposures.
A use case that has emerged in recent times is the concept of “peer-to-peer” trading of energy, notably electricity. With the rise of the “prosumer” and “behind the meter” micro-generation or storage of energy (e.g. batteries or solar panels), consumers are able to sell back excess energy to a localised market. Pilot projects such as the LO3 Brooklyn microgrid have explored feasibility. While peer-to-peer models bring the prosumer towards having “direct market access”, the customer need/desire for this remains unclear. Do these customers really want to trade in the market and be exposed to market fluctuations? Additional challenges include credit issues – with these solutions, there would appear to remain a role for aggregators or suppliers not least to provide this credit support and manage balancing market risks.
In most power markets (including GB), we have a highly centralised market model where the “supply license” holder fulfils a variety of responsibilities on behalf of the customer and to the network. To create a truly disintermediated model with customers facing each other directly would require a major overhaul and numerous regulatory changes to the current supplier license model – this could happen but would take several years to play out. In that sense, the more material challenges are those relating to industry rules and regulations as opposed to the underpinning technology.
In future editions of this blog series we will explore additional energy market use cases for distributed ledger technology.