Energy looks to blockchain for efficiency gains
Distributed ledger technology is key to the next stage in energy management
Energy market participants have long been considered behind the curve in terms of picking up technological advances compared to other industries. Even now, physical oil transactions are settled between fax machines and deliveries of large shipments that have traversed the globe are accompanied by long paper documents. And much has been made of the exploration and production projects that were curtailed in large part thanks to the collapse of the oil price over the past few years; but the tightening of budgets at most energy firms also stretched to research and development initiatives within IT systems.
Now, interest has heated up for distributed ledger technology (DLT), with energy companies across the entire supply chain chasing the efficiency gains that may be found in blockchain technology. It could be a game-changer, say market participants and academics.
"The technology will make energy trading possible without the need for intermediaries," says Astrid Schober, chief information officer within the IT management division of Wien Energie, the Austrian utility firm. "There will be no need for us to work with third parties anymore."
Blockchain, a form of DLT, may seem like a straightforward process, but the possibilities it holds in terms of disrupting energy markets are astronomical. It's a form of technology that uses open peer-to-peer transaction platforms and decentralised storage to record transaction data. It removes the need for transactions to be stored in a central database, with each participant reviewing developments at various stages of the process.
Each piece of information in the transaction passes through a pre-existing set of rules and definitions before being added as a block, allowing for each specific contract to be automatically checked and processed. The information is stored in such a way that these so-called smart contracts can be inspected at any time by any of the interest holders for progress and changes; but with the pre-agreed set of rules in place there's little that can go wrong.
"We strongly believe that most of the back-office processes will be completely automated, without human intervention," says Schober. "That will allow us to significantly reduce our transaction costs."
Open access database
Initially developed for Bitcoin, the first cryptocurrency, the technology is an open access database that allows anyone with a computer to acquire the information stored on it. From there, a variety of industries—with banks and the wider financial sector being a main advocate in developing its use-began to recognise the potential it holds.
However, with regulators over the past few years cracking down on data management, and firms careful to protect sensitive transaction and corporate data, developers began to work out how to segment their interactions with the technology. With that motivation in mind, permissioned levels have been applied to blockchain, in which sophisticated authorisation techniques are provided to those relevant to a transaction. That creates the need for one or more parties to provide such access, and the role of a "gatekeeper", who in some instances will be charged with dispute resolution, should that function be required. The application may seem straightforward, but it could provide energy firms with a much-needed technology revolution.
"Blockchain could really be the game-changer the industry has been crying out for, for such a long period of time," says the head of research at a London-based multinational commodities trading firm. "Energy is still using technology from 2005—and some companies even before then. They just haven't been able to invest over the past few years and traditionally there's been a cultural block in wanting to evolve. Why invest in something that's perhaps intangible when you can go out and look where to plant wells? But a lot of these players have recognised that blockchain could cut out a lot of inefficiencies and drive down costs."
Wien Energie has chosen to work with smaller technology partners to help develop its blockchain solutions, including German energy software and IT service provider Ponton. This decision, Schober says, was motivated by smaller firms' ability to move with the market quickly. That's crucial, given how swiftly the technology is advancing, she adds. Not everyone agrees with that sentiment, with technology giant IBM central to a number of high-profile trials in the energy sector over the past 12 months.
The sheer volume of trials carried out by the industry over the past year pays testament to how seriously energy firms are taking blockchain. And while uptake of new technologies can be a lengthy process, several initiatives have been established among companies large and small to develop the technology collectively. In June, BP—working with Wien Energie and Canadian blockchain start-up BTL—announced a successful trial in which the firms tested a trading system on the DLT. Around the same time, BP and Eni Trading & Shipping announced they were examining ways they could make use of the technology for their European gas trading operations. Centrica, Engie and Royal Dutch Shell have joined forces to launch an international energy blockchain, called the Energy Web Foundation.
Many of the applications are being rolled out on newer energies, too. RWE's power utility subsidiary, Innogy, has run trials to explore how blockchain technology can authenticate and manage the billing process for a network of electric-vehicle charging stations in Germany and California. Germany-based Motionwerk's blockchain bill-payments system is said to have made traditional systems redundant.
15,000—Number of blockchain developers Airbus needs
"Everyone's taking this seriously," says the head of research at the London-based trading firm. "There's a concern that if you don't get on board with this stuff you'll end up well behind the greater narrative here, and given how difficult it's been to extract profitability in the last few years, it's not really a surprise that there's a fear of missing out on something as huge as blockchain could be."
Wien Energie's Schober agrees that as energy markets change, blockchain applications will become more prominent. "Over the next two-to-five years we'll be using the technology to target transaction costs by automating a lot of our processes," she says. "By using smart contracts we can automate a lot. The next step will be applying new business models where we target certification of origination for clean electricity, for example. This will be a huge development over the next few years. It's an area we're already working on and we're gaining a lot of experience in and gaining a lot of know-how in our company."
Greater consumer control
Changing these processes is crucial, she says, with outdated and costly systems leaning heavily on firms' bottom lines. There'll also be significant benefits to consumers: a report by PwC, the global accountancy and consultancy firm, says electricity consumers will have far more control over their usage. With the use of blockchain technology "all electricity delivered to the networks can be clearly attributed to individual customers in small time units (down to time-windows of only a few minutes)," the report said. Producers and distributors will also benefit through variable prices, it said.
"The physical electricity as such would continue to flow to the end-user directly from the closest generator. A significantly improved database would allow for network operations to be fine-tuned better at both distribution and transmission levels," the report added. "A simplified clearing process would lead to less balancing energy being charged to market participants."
The straightforward processes and the use of smart contracts on a decentralised network will be key to the health of the industry, as they will make a lot of the costs obsolete. "Billing of micro-transactions has become too costly to run so we believe the blockchain will allow us to carry out micro-transactions for greater electromobility," says Wien's Schober. "Smart contracts will be key to this."
Elsewhere, S&P Global Platts, the commodities price reporting agency, announced in mid-February that it was rolling out its own blockchain network to allow market participants to submit weekly inventory data to Dubai's Fujairah Oil Industry Zone (FOIZ) and its regulator, FEDCom. Using blockchain will alleviate the need for the regulator to manually validate and aggregate much of the refined oil storage at each of the 11 terminal operators in the FOIZ network. Not only will the application remove human error and improve the security of data transmission, it will significantly reduce the data management requirements at FOIZ and FEDCom.
"Blockchain innovation will allow Fujairah's terminal operators, such as us, to deliver operations in a more efficient and secure environment," said Mamdouh Malek Azizeh, commercial director at Fujairah Oil Terminal FZC. "We are delighted to take part in this process, which will allow Fujairah Oil Terminal to increase operational efficiency and data management security. The technology will allow us to deliver results under a secure and no-risk environment, which is seminal to the energy industry."
That's not to say everyone in the industry is convinced. With the prospect of changing business lines and reassessing back and middle-office processes to work with blockchain, a change in mindset is required. Further, blockchain is still associated with cryptocurrencies, which many still consider sceptically. As promising as blockchain seems, there's still a misunderstanding of how it can be applied, says Bryant Nielson, executive director at the Blockchain Academy. The inability to work out how to apply blockchain processes, as well as the process by which companies can move away from legacy systems, is a stumbling block for some.
"There's a deficit in knowledge at developer level," says Nielson. "You're taking a lot of relied-upon, entwined business legacy systems and breaking them up at management level then applying blockchain solutions. The cost to manage all of these duplicated systems is enormous—which is where blockchain can really add benefits, but moving business processes away from current platforms obviously brings with it challenges."
'Artificial intelligence is the next stage in development—we'll definitely be looking into it'—Schober, Wien Energie
However, he says given that the blockchain industry is still in its infancy, companies may well be scrambling to get their personnel in place. "There are about 7,500 blockchain developers globally. I was at a conference in Berlin recently and Airbus said they needed 15,000 blockchain developers to manage their supply chain. Extrapolate that into the financial sector, for instance, that probably needs 250,000 blockchain developers globally."
Nielson added: "when you throw in supply chain, you're looking at 2.5m blockchain developers". However, the number of blockchain developers needed globally—including for use in digital identities, smart contracts for legal work, real estate and governments—could top 12m, he said.
While blockchain advocates say the middle and back-office-resource costs will be slashed, the need for developers capable of not only implementing the technology into legacy systems but also keeping up with the latest blockchain trends will add to costs, Nielson said.
Firms will also have to decide the best way to govern smart contracts—and who will be responsible for them, says the head of research at the commodities trading firm. "Contracts will have to be drawn up in a language management can understand, obviously, but then they'll need it translated into code. So do you have coders do that, and what if something gets changed in that process? Or do you train up lawyers to code, or check the code after it's been digitised?" The head of research adds: "It's really not just about changing processes, it's about changing people, the way we do things and the way we operate as an industry."
That's not where the legal hurdles end. Some regulators are considered to be highly innovative where it comes to new technologies, while others are less so. The US Federal Energy Regulatory Commission (FERC)—the country's federal agency in charge of regulating the transmission and wholesale sale of electricity—is thought to be monitoring blockchain developments and keen to offer support to market participants looking to invest in the technology. But others are less progressive. That could make trade across national boundaries difficult.
"Say you're shipping a delivery of oil to a jurisdiction where the regulators might not have worked with the market on smart contracts," says the commodities trader's head of research. "So the tanker shows up and tells the port authority to check the smart contract. If that jurisdiction simply doesn't recognise them yet, you might have no choice but to take the shipment elsewhere. Regulators are interest holders—they need to be brought into the plans as well."
Regulators must keep up
In financial markets, where energy companies transact and hedge against future prices, regulators are attempting to adapt to the changes and take the technological developments in their stride. In the US, the Commodity Futures Trading Commission (CFTC) last year launched its technology research unit, LabCFTC, in order to work with the market on developments such as blockchain. In the UK, the Financial Conduct Authority (FCA) has long encouraged firms to use its Sandbox facility—which allows market participants to interact with the regulator as they develop technology solutions. Blockchain is central to that.
According to Schober, having regulators in tow as developments manifest, rather than hoping they catch up, could be pivotal in seeing blockchain's uptake. "Some jurisdictions don't recognise smart contracts, making things difficult in the highly globalised energy market," she says. "The Austrian regulator has been very supportive and we've communicated well with them. It's a matter of working very closely with the regulator." Those regulators who don't follow developments may find themselves very much behind the times, with market participants accelerating their research and carrying out trials constantly.
The next stage of development looks to be in how artificial intelligence (AI) can be used on the blockchain. Here, systems will be able to learn for themselves how to make greater efficiency gains by analysing trade data. Sources suggest BP's technology branch is looking to enhance its AI, and WePower, a utility platform that utilises AI blockchain technology for renewable energy forecasting, grid balancing and consumer trends has seen interest from investors and energy traders across the globe.
"We're currently at trial stage with blockchain," says Schober. "It's going to be the future for us. AI is the next stage in development—we'll definitely be looking into it."