Keith Townsend

Blockchain Technology Impact on Energy Market Transformation: Secured Distributed Energy Transactions in the Cloud

The electricity market is undergoing a transformation. The basic tenet of a centralized production, transmission and distribution system where consumers purchase electricity from a single provider is increasingly developing into a decentralized, multiple provider system centered on renewable energy,1 in which the customer may produce, consume, and then sell excess electricity capacity like a commodity in an open market, where transactions are transparent, verifiable, and secure. Major drivers of this shift include customer demand for energy independence from the broader electricity grid controlled by utility companies; reduction in energy costs; and the global commitments of influential multinational companies to purchase electricity from renewable energy sources to reduce carbon emissions.2 Technology companies have also begun to move into the energy space; Apple’s request to become a wholesale provider of renewable energy throughout the country3 was recently approved by the Federal Energy Regulatory Commission (“FERC”). Companies like Apple,4 Google,5 Amazon6 and other non-utility enterprises may ultimately become direct competitors to traditional utility companies in the sale of renewable energy based electricity directly to retail customers through blockchain technology. For now, Apple and Google are authorized to sell excess energy capacity in the wholesale energy markets and could do so with blockchain technology. In the future, if either Apple or Google were to provide energy from renewable sources to customers in retail markets under various distributed energy scenarios, a viable blockchain distributed ledger technology would provide the same seamless, secure and transparent accounting of these transactions.

Blockchain technology is potentially the mechanism to transform energy trading in a decentralized electricity market. The blockchain is a shared and trusted distributed ledger technology that permits the recording of any digital asset transaction between parties over a decentralized encrypted network. Initially developed as a mechanism to record financial transactions using the Bitcoin cryptocurrency financial technology or “fintech,” the blockchain technology has generated broad interest in other business sectors,7 including energy trading.8 Blockchain technology confirms transactions in real time, and ensures the integrity of transactions through the secured exchange of digital currency.9 Furthermore, the blockchain technology is promoted as beyond the hackers’ nefarious reach.10

Siemens announced on Nov. 21, 2016 an agreement with New York startup LO3 Energy to jointly develop microgrid11 that enable local energy trading through blockchain technology.12 For example, a provider of electricity from a rooftop solar system would feed excess electricity back into the existing local grid, and receive payments from customers purchasing the renewable energy. The technology being tested stores and validates data that permits direct transactions between energy producers and consumers. In April 2016, successful peer-to-peer (“P2P”) energy transactions occurred in Brooklyn, New York between rooftop solar producers of renewable energy and consumers through the use of LO3 Energy’s blockchain technology over the company’s TransActive Grid.13

Various industry analysts have begun to chart the possible implementation of blockchain technology in energy markets. A Navigant Research report concluded that while utility companies are exploring the use of blockchain technology, the immediate benefit of the technology is in P2P energy trading among smaller decentralized distributed energy systems such as microgrids, in which owners of distributed energy resources such as solar and wind production facilities sell energy directly to customers.14 In a Price Waterhouse study, the company determined that the blockchain technology will support transparent energy supply chain transactions and play a role in energy metering, billing and confirmation of ownership of assets, among other potential benefits.15

The success in deploying blockchain technology in energy trading markets or any other business enterprise will depend upon how the practical applications of the technology develop, and how those applications will be regulated.16 Whether the development and use of blockchain technology is driven by open-source agreements, protected by patents and licensing agreements, or a combination of both approaches to deploying the technology is an open question.17 Furthermore, whether Bitcoin will become the currency of choice in the energy trading markets, or for any other digital market transaction and how the financial transaction is regulated, is an open question. The absence of a single standard or approach to government regulation of the application of the currency transaction applicable to use of the technology in commercial transactions is emblematic of the regulatory hurdles that must be overcome. Federal regulators have pursued different approaches to regulating Bitcoin. The Commodity Future Trading Commission (“CFTC”) has begun to regulate the trading in cryptographic currencies, such as Bitcoin, as financial derivatives.18 The Office of the Comptroller of the Currency (“OCC”) has requested comments on whether the federal government should create special purpose national banks for fintech companies.19 The Securities and Exchange Commission (“SEC”) has sought comments on whether transactions using blockchain technology require registration under existing regulations for transfer agents or clearing agencies.20 The outcome of these domestic questions regarding the legal and regulatory treatment of block chain distributed ledger technology will impact efforts to create standards to govern the use of the technology in domestic and international trade in goods and services now under consideration. Uniform standards on interoperability, data security, and currency payments are imperative if blockchain technology is to become the electronic distributed ledger technology for goods and services, including energy transactions.21

In the private sector, the National Association of Securities Dealers Automated Quotations System (“Nasdaq”) has encouraged the use of blockchain technology. Nasdaq announced on Dec. 30, 2015 that “an issuer was able to use its Nasdaq Linq private blockchain ledger technology to successfully complete and record a private securities transaction – the first of its kind using blockchain technology.”22 Furthermore, Nasdaq continues to promote blockchain technology as a transformative technology that ensures efficiency, transparency and data security in financial transactions.23

On February 28, 2017, a blockchain technology consortium known as the Enterprise Ethereum Alliance (“EEA”)24 was launched by a diverse group of multinational businesses and software developers, including Accenture, Banco Santander, BlockApps, BNY Mellon, BP, Credit Suisse, Cryptape, ING, Intel, J.P. Morgan, Microsoft, String Labs, Thomson Enterprise. The EEA was created to further the development of a free to use, open source industry standard for blockchain solutions to serve as the foundation for business transactions by ensuring transparency, trust, privacy, and performance in peer-to-peer and multiparty agreements among other applications.25 According to Jeremy Millar, founding board member of EEA, “Ethereum is already one of, if not the, most widely used technologies for developing and deploying enterprise blockchains. Enterprises love the availability of open-source implementations, a single standard, the rapidly growing developer ecosystem, and availability of talent. But enterprises expect resilient secure systems and a robust controls environment. EEA aims to bring these together, both to provide enterprises the forum they need and also to advance Ethereum generally.”26

The response of government regulators to unanswered questions regarding the regulatory treatment of the technology and how best to exploit the use of blockchain distributed ledger technology in the trading of goods and services are expanding. On February 9, 2017, Congressmen Jared Polis (D-Colo.) and David Schweikert (R-AZ) announced the launch of the Congressional Blockchain Caucus.27 The bipartisan caucus is “dedicated to the advancement of sound public policy toward blockchain-based technologies and digital currencies.”28 Congressman Schweikert has replaced former Co-Chair of the Blockchain Caucus Rep. Mick Mulvaney (R-S.C.) who was recently confirmed as President Trump’s Director of the Office of Management and Budget. The importance of harnessing the value of blockchain technology in domestic and international commerce is reflected in the comments of Congressman Schweikert, “Open blockchain networks and distributed ledger technologies are still new, but it’s critical for members of Congress to begin comprehending both their current applications and future use cases” and that “it is critically important the United States remain competitive regarding emerging technologies, and distributed ledger technology is the open, secure, efficient technology backbone we’ve been looking for.”29 Recently, the United States Department of Energy (“DOE”) requested proposals on the use of blockchain distributed ledger technology to ensure the security of energy transactions.30 The request for proposals states that “DOE is currently investigating novel approaches to leverage and explore blockchain technology, initially developed within the financial sector, for the realization of robust fossil energy-based systems” and that “proposals are sought to develop novel concepts for energy systems that rely on blockchain technology to assure robust systems that are less susceptible to cyber-attack.”31

With the rise of fintech, a global effort is underway to create universal standards for seamless, transparent and secured electronic commercial transactions based upon the blockchain distributed ledger technology. The International Organization for Standardization (“ISO”), an independent, non-governmental international organization that develops standards in response to global challenges,32 has established a technical committee, ISO/TC 307, to develop voluntary standards for the use of blockchain distributed ledger technology in national and international trade in goods and services.33

Based upon the proposal of Standards Australia34 to the ISO in 2016,35 the mandate of the technical committee is development of global “standardization of blockchains and distributed ledger technologies to support interoperability and data interchange among users, applications, and systems.”36 The work of ISO/TC 307, under the leadership of Standards Australia, commenced in Sydney, Australia on April 3-5, 2017.37 The United States, Canada, China, Germany, Japan and Russia are among seventeen participating ISO members while Argentina, Iran, Israel, and South Africa are among seventeen observing ISO members.38

The scope of economic, legal, and regulatory parameters for the use of blockchain distributed ledger technology in public and private exchanges is evolving and may take decades to be fully realized.39 As this occurs, the technology will continue the transformation of electricity market energy supply transactions. Navigant has described this evolution as the emergence of a decentralized energy marketplace, an “energy cloud,” in which blockchain technology can serve as a secure digital ledger for energy transactions.40 The nexus between private sector innovation and limited government regulations, however, will determine whether blockchain technology transforms the global economy in goods and services, including distributed energy transactions.41 The results of the ISO/TC 307 will greatly impact the evolution of blockchain distributed ledger technology as a viable records keeping component in national and internal supply chain management of energy transactions.

* Keith Townsend is an attorney in Washington, D.C. and counsel to the Apartment and Office Building Association of Metropolitan Washington on utility and energy market transformation issues involving the economic impacts of technological and environmental developments on legal, regulatory and public policy decision-making. Mr. Townsend’s related experience includes serving as counsel to Pepco Holdings, Washington Gas, the United States Telecom Association and Sprint, Senior Legal Advisor to an FCC Commissioner and attorney for the District of Columbia Public Service Commission. He is a graduate of Georgetown University Law Center and Georgetown University.