Blockchain for Energy & Commodity Management

Intermittent renewable power generation is on the rise, and system stability on local, national and European level is the key objective of power grid management. Direct peer-to-peer trading with aggregation to virtual power plants (VPP) is a viable solution and could build on Blockchain technology.

A prerequisite for local P2P trading is the reduction of traded lot sizes. In energy & commodity trading, standardized units are defined according to size, quality and quantity. Standardized criteria and lot sizes are necessary to overcome transaction costs in the current market configuration. Actors are not able to sell on wholesale power markets if the offer does not match the standardized criteria.

They are required by third-party intermediaries (brokers, banks) to draft contracts. Thus, commodity traders are de facto big clients or specialists. Blockchain is able to reduce transaction costs through standardization via smart contracts and the automatic execution of orders. Transaction costs decrease dramatically, allowing smaller lot sizes and bypassing intermediaries. In fact, one application of Blockchain technology is in the distributed generation of renewable energy using smart meters to track electricity use.

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In this setting, “prosumers” not only consume commodities but also dispose of generation capacity in the form of solar systems, small-scale wind turbines or CHP plants. Blockchain technology strengthens the market role of individual consumers and producers. It enables prosumers to buy and sell energy directly – manually or via automation – with a high degree of autonomy.

Aggregation of Microgrids to Virtual Power Plants

The term virtual power plant refers to clusters of electricity generators, loads and storage systems that are pooled in an intelligent manner and controlled jointly. The VPP proper represents a central platform from which dispersed assets can be monitored and controlled remotely. As VPP fleets are an aggregation of various asset types and energy sources, they provide a certain level of flexibility, allowing VPP operators to respond to market and price changes within very short time frames.

In order to be able to participate in energy exchange, plant operators have to produce forecasts so as to minimize fluctuations. The complexity involved in producing forecasts varies for each type of generation facility; deriving forecasts for wind and solar power output is a more complex task than for controllable power plants like gas-fired power plants. If a plant operator fails to forecast its output accurately, it will incur imbalance charges. Plant operators who can provide accurate forecasts can benefit from higher revenues.

If controlled intelligently, VPPs aggregating widely dispersed and strategically clustered assets can be used to optimise power flows, thus serving as a power flow optimisation tool complementing network development. Even today power flows can be optimised with the help of renewable power generation facilities, for example by aggregating wind turbines and controlling them jointly. In this way VPPs can contribute to compensating for and bridging insufficient network development.

A central actor could deploy Blockchain solution that automatically integrates local information and optimizes local grids. The local grids are then aggregated to virtual platforms, providing stable power capacity at low cost. This aggregation can include multiple actors and have a central player or only one player could deploy it for several distributed grids.

In the past, the organisation and management of VPPs of different sizes was complex and costly. Blockchain technology has the potential to make this process more efficient. On a lower level the VPPs can – based on smart contracts – optimise themselves to a certain degree, and if the balance of the current optimisation level is not sufficient, then optimisation against the next higher level (e.g. distribution grid) can be done via Blockchain very efficiently as well.

Examples for Local Trading Between Small Consumers and Prosumers via Blockchain

Ponton developed a simulation of a local energy market based on EPEX SPOT next-hour prices. This price curve is used to drive the behavior of participating batteries and an electrolyzer. For the electrolyzer, Ponton developed a trading strategy with two goals: consume 1 MWh within the simulated runtime of 24 hours and buy hourly chunks of electricity, depending on the actual head-hour market price.

The system uses an agent-based architecture connecting the devices as market participants to the local marketplace. Each agent is controlled by an individual behavior – acting as a consumer, a generator or both. The marketplace itself was built based on Blockchain technology.

Asset Tracking, Bill of Lading, Transfer of Title

In the logistics chain all parties require continual consensus with other parties. These actors usually use completely different information tracking systems, leading to significant challenges for the optimization of the shipment process. The key challenges Stratum identifies are sharing information between systems, unsynchronized payments and deliveries, and auditing.

Currently, each party in the supply chain purchases goods, adds value and sells these goods to the next actor in the chain. The related transfers of ownership are often still recorded on paper and fraud remains a persistent risk. Blockchain solution for the tracking of physical commodities along the supply chain addresses the key challenges and can reduce costs significantly.

Financialization of Commodities

Physical trading between a buyer and seller in different countries is costly, prone to error and involves a financial intermediary to process the transaction. Commonly, letters of credit (LC) with security and guarantees from banks are used for these transactions.

Making use of Blockchain technology tackles the disadvantages while maintaining the security LCs provide. The typical smart-contract application in goods trading could be designed as follows: via his node, the selling party receives a payment confirmation that will take place later, once a set of conditions is met. On the physical side, goods are tagged with QR codes that are linked to the smart contract. Upon arrival of the goods, the payment is automatically triggered through the execution of the contract.

The QR code/smart-contract solution is an example of how Blockchain can improve the traceability of physical commodities. Today only the front end of commodities trading has been financialised, in the form of electronic trading. With blockchain, the infrastructure could be financialised as well.

Fewer Intermediaries Through Immutable Records and Reconciliation Reporting

Blockchain technology is increasingly being seen as a commercial tool for transparency, visibility and security in numerous sectors. It could hence play the role of clearinghouses and brokers. The technology inherently and automatically provides all the confidence needed. In over the counter (OTC) energy & commodity trading, both counterparties confirm the deal details in order to minimise the risk of misunderstandings or errors. This process of “confirmation matching” is traditionally performed via fax or electronically at each commodity trader’s back office.

According to Ponton, Blockchain could be used to completely automate this process. With Blockchain technology, the exchange of trade confirmations could be done on a peer-to-peer basis, i.e., directly between the counterparties without any middleman. OTC commodity derivative trading in particular could be a quick win for blockchain: OTC commodity derivatives have fewer clearing requirements and, overall, the smaller market size could favour a smart-contract rollout.

Ponton has launched its own Blockchain platform, Enerchain. Enerchain is a platform for peer-to-peer trading in the wholesale energy market. The software allows traders to anonymously send orders to a decentralized order book, which can also be used by other organizations. Thanks to this technology, Enerchain does not require a central authority. To date, 23 European energy suppliers and traders have joined the Enerchain consortium.

Developments and Outlook

As of now, Blockchain offers an opportunity for large utilities and commodity traders. They could individually or in consortia move to Blockchain solutions, reducing transaction costs for their processes and maintaining their current position. One example of this development is the newly founded Energy Web Foundation. Another example is Poton’s Enerchain project, where European utilities seek to create a standard for Blockchain technology in the energy sector.

A less known application of Blockchain technology are business processes. These processes are based on a case-by-case analysis of business processes with the identification of pain points that can be tackled with Blockchain solutions. This approach can be applied in the very short term, aiming at increasing process efficiency and increasing automation.

The real potential of Blockchain technology unleashes with the Internet of things (IoT). In an IoT environment machines communicate directly without any human interaction. This machine to machine (M2M) communication could be managed with blockchain(s), leveraging its benefits, such as immutability, speed and automatization. It will be interesting to see, how these will create even more use cases in future.

© 2020 by Velmie

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