The Future Is Now: Europe’s Power Market to Start Blockchain Trading This Year
Some of Europe’s biggest electricity operators plan to start trading on a blockchain platform before the end of this year, although a collision with the European Union’s regulatory apparatus remains a possibility. E.ON, Enel, and Engie are among the companies involved, according to Henry Edwardes-Evans, Power in Europe editor at London-based S&P Global Platts. Concept developer Ponton has signed up about 20 utilities from across Europe and is in talks with more, Edwardes-Evans said in a June 19 podcast.
Ponton is developing a peer-to-peer trading tool based upon blockchain technology. The Hamburg, Germany–based company supports forming industry groups, or consortia, that standardize business-to-business processes. “The blockchain has not only technologically high potential for the future but is also a challenge to jointly achieve the transition to a higher level of collaboration,” the company says on its website. “This can only be achieved if the parties work together.” The European products to be traded are “pretty much anything that can be physically delivered, so forward and spot for both gas and power,” Edwardes-Evans said.
Oil traders are not moving as quickly due to legal concerns, said James Rilett, global innovation director at S&P Global Platts, who also participated in the podcast. (A transcript of the podcast is available on Platts’ website.) “It’s really interesting to hear about the cooperation between gas and power companies, because in the oil market, for example, it’s not always easy to get participants together around the table,” he said. “In fact, we’re hearing that recent plans for a meeting amongst crude oil traders couldn’t go ahead because of in-house counsel and maybe even regulatory concern over antitrust connected with that.”
The first blockchain was conceptualized about nine years ago in a paper written by Satoshi Nakamoto, who is also credited with inventing the decentralized electronic currency Bitcoin, although others had written about the idea of cryptographically secure chains of blocks during the 1990s. One of the most appealing things about blockchain is that it is inherently resistant to having its data modified. Through use of a peer-to-peer network and a distributed time-stamping server, a blockchain database is managed autonomously.
Nakamoto’s database concept was rolled out in 2009 as a core component of Bitcoin, acting as the public ledger for all transactions. The invention of a blockchain for Bitcoin made Bitcoin the first digital currency to solve the double-spending problem without the use of a central server or trusted authority, The Economist magazine said in a 2015 article. Blockchain’s cryptographic technology has applications “well beyond cash and currency,” The Economist said. “It offers a way for people who do not know or trust each other to create a record of who owns what that will compel the assent of everyone concerned. It is a way of making and preserving truths.”
The decentralization of the blockchain contrasts sharply with the centralized approached of traditional regulation, creating the prospect of a significant clash, Rilett of S&P Global Platts noted. “Yes, it’s a big issue, and it’s not just antitrust,” he said. “I mean, blockchain creates a fully decentralized environment for trading. There’s no central authority or permissioning system, everyone has a copy of their own distributed part of the ledger, and that’s encrypted. And how do you regulate a decentralized environment? This is completely new territory for regulators.”
Since its liberation from being an arm of the government, the internet has done exceedingly well without a regulatory apparatus. Shane Greenstein’s book “How the Internet Became Commercial” doesn’t have the word “regulation” mentioned in its index. A logical lesson is that blockchain should be left alone for maximum benefit. The Internet’s successful rebirth was attributable to a “symbiosis” between industry and government, according to Greenstein, meaning ideas can gain ascent from government officials without them resorting to regulation. “The Internet inspired honest policy wonks,” he wrote. “It appealed to the utopian ideals of the global communication network. Many could speak of a vision, working for a better day, vaguely in the future, when networks could connect the world and permit participants from the far reaches of the earth to communicate with one another.”
Eurelectric, the European electricity association, recently began a one-year project to examine what blockchain could do for e-mobility in electricity, flexibility, and trading, Henry Edwardes-Evans said. The aim is to make politicians and regulators become more literate in the technology. “Blockchain is seen as a Wild West area for trading still,” he said. “It’s in early stages, not mainstream yet. But every company that I’ve come across is looking at use cases for this technology, whether that’s in generation, networks, trading, or retail.”
The paper might be little better than a doorstop by the time it’s published, Rilett said. “That’s interesting and encouraging to hear, Henry, and I can see why they’re taking that role,” he said. “But I just wonder — I mean a one-year study might be too slow to be useful. The technology is changing every few months, it’s being developed in real time. It’s going to be really difficult for policy makers to keep up.”
The European Union plans to spend 500,000 euros in the next two years on a “blockchain observatory,” said Siobhan Hall, who is Platts’ Brussels-based expert on European energy policy. The observatory will attempt to keep the European Commission up to date on all blockchain developments around the world, including legal and regulatory matters, she said during the podcast.
European regulation might boost companies experimenting with blockchain, Rilett and Edwardes-Evans posited. Comparing Europe favorably to the United States and Asia, Rilett said, “We have a much more consolidated regulatory environment, so there’s a better chance of a consistent regional approach, which could work in favor of those trying to adopt the technology.”
Edwardes-Evans said, “Yes, and a regional approach lends itself well to creating regional markets, which then need to be reduced right down to microgrids and distributed networks at the local level, because blockchain really does support those disaggregated emerging markets.”
Blockchain is being implemented right now, Rilett emphasized. He sees some “quick wins for traders” in adopting the technology. “For example, blockchain has been cited as significantly reducing compliance costs. It can definitely help transform ‘know your client–KYC’ processes, anti-money-laundering processes,” he said. “These are really laborious at the moment, and expensive, and a regulatory requirement. So blockchain could automate a lot of that and make it much more efficient and transparent for participants and regulators alike.”
Regulation of blockchain is puzzling, yet demand for it comes from different quarters. “I just want to add here that obviously regulators will want and need oversight of blockchain trading when it comes,” Hall said. “But adding a referee to a peer-to-peer network goes against the ethos of everyone being equal. That will be the challenge for the community of blockchain-technology people putting these things together.”
Rilett added, “That’s exactly right. That’s the paradox here. But equally traders are going to need enforceable laws for the smart contracts (or contracts that execute themselves under the right circumstances) that they’ll be using. Like I said before, it’s going to be difficult, but it’s very important to have an enforceable rule of law behind a transaction, whichever network it sits on.”
Blockchain is moving speedily and impressively. Regulators would be wise to stand aside. If regulation collides with it, it could be bad for business.
