As renewable energy and storage solutions, along with the transformation of consumers into prosumers, have been reshaping the face of the energy sector around the world, the industry is facing another transitional moment. This time it comes from the outside and has the potential to be the next big thing in energy.

Until recently only known by adepts of virtual currencies such as Bitcoin, the blockchain concept made a splash in 2016 and has been eyed by a number of moguls all over the business spectrum, from finance and banking to energy and utilities.

So, what is blockchain?

In its core, blockchain is a technology allowing decentralised transaction over a P2P network which creates chains of transactions piled in blocks. Unlike historical trading platforms, the entire process foregoes centralized administration and control and uses virtual currency, such as Bitcoin or the equally dynamic Ethereum, smart contracts, etc. The required administration is done by computers (‘nodes’) in the network on a distributed principle, applying a complex algorithm. Each transaction in the chain of blocks is registered virtually forever and without the option to be modified. Hence the name ‘blockchain’.

While some observers raved about blockchain as, possibly, the first revolution in fintech in more than 20 years and saw in it a potential for more transparency and money laundering prevention, others did not jump on the praising bandwagon, deeming it as a perfect environment for unsanctioned (and possibly illegal) interactions. The open nature of blockchain and the shorter periods and options for completing transactions however, seem to be picking up adepts among financial institutions eager to be one step ahead of what seems to be an inevitable demise of banknotes and coins in the not-so-far future. Not to forget, diminishing regulatory costs has been a great factor of attraction giving a buzz to energy traders and utilities which happen to navigate regulations-ridden waters.

Skipping the middlemen

Recently energy companies have been keener to experiment with blockchain because it allows direct exchange among the members of the system. There have been a number of demo projects in this regard, such as a microgrid in Brooklyn, NY, which allows households equipped with PV panels to sell and buy energy among them. Power production is tracked by smart meters while transactions are registered in the Ethereum platform, giving blockchain an edge as a powerful enabler to distributed production and a premise for the emancipation of consumers from centralised utilities.

Then the banks came. When finance giants such as Barclays and HSBC said they were to test blockchain transactions, European energy majors used the created momentum to announce larger-scale developments.

Last year in Belgium, German B2B tech company Ponton demonstrated for the first time ever day-ahead power trading with delivery date November 5. For the purpose Ponton has developed a dedicated blockchain platform called Enerchain. A mere six months later, in May 2017 twenty big energy names such as RWE, Total and Engie, among others, announced that they will be splitting the cost of a pilot project for bilateral trading in life-size scale. According to Ponton their solution is to be integrated with the existing infrastructure of these partnering companies. Forward and spot trading of power and natural gas with physical delivery on regional markets is also in the pipeline, Ponton said.

Gains come with high stakes

While advantages of blockchain have been clear from the get-go, there are risks to be taken into account. First of all there are regulatory risks. How could a regulator be added to a system which supposes the lack of centralized control in the name of efficiency and transparency is a question yet to be answered. And due to the character of the energy and utilities business this might end up as dilemma without a solution.

Power, gas and commodities have been subject to a rising number of regulations, such as the upcoming MIFID II. Meanwhile companies have been innovating with an ever faster than ever pace forcing regulators to keep up with them. And blockchain accommodation claims by energy giants means that the strain on regulators to act faster is set to grow. Meanwhile European market participants have been putting efforts and means into developing trading mechanisms and platforms which could hardly be abandoned without a consequence and should rather see some degree of integration with blockchain, rather than compete with it.

Last but not least comes the quality control of the physical delivery of a service or a product traded in blockchain. While blockchain seems extremely applicable to financial transactions, it is unclear who would control the arbitration of conflicts created by unaccomplished contracts or bad quality.

This article was first published in Bulgarian in the July’2017 issue of Utilities magazine.