With so much media coverage about the value of cryptocurrencies, the potential of the technology sitting behind them - blockchain - often seems to be missed.
In this article Nick Rains, Chartered Legal Executive in TLT's Corporate team talks to Kay Hobbs, Partner in TLT's Clean Energy team about how blockchain might be utilised in future clean energy projects.
What is a Blockchain?
To explain the concept, imagine you work in a sales team and have a spreadsheet on your computer. Each of your colleagues also has a copy of this spreadsheet on their computer. This spreadsheet individually lists each sale your company has made, and who it was made by. The details of each sale is known as a "block". Let's say you then close another sale. You go onto your copy of the spreadsheet and insert the details of the new sale, adding a new block to the chain of other sales. Once you have done this the system checks that it is a valid sale (in accordance with whatever rules it is programmed with), and once it has done so it creates the “block” and automatically and instantaneously updates all other copies of the spreadsheet.
The same principle can easily be applied to a whole range of areas, just swap out "sales information" for your relevant data set, such as "megawatt hours generated".
Renewable Obligation Certificates
One of the most touched upon applications of blockchain within renewable energy is in relation to the centralised database of accredited projects and processing of ROCs. Project owners currently need to collect their export data and submit it to Ofgem, who then process it in accordance with the ROC banding applicable to the project. This is a time consuming process, and the most recent timetable issued by Ofgem states that, for generation occurring in the month of February 2018, ROCs won't be issued until 15 May 2018. This is a 2 to 3 month wait. Thereafter, ROCs need to be transferred from the project owner to the ROC purchaser (assuming a ROC recycling mechanism under the power purchase agreement (PPA), rather than the project owner opting for an auction process). Depending on the terms of the PPA, ROC recycling may occur in bulk once a year, rather than on a monthly basis.
For the seller or purchaser of a renewable energy project, this can be problematic. The revenue generated by selling ROCs makes up the vast majority of the financial value (for example brown power revenues often account for as low as 40% on 1.2 ROC solar projects), and this delay can therefore have a significant impact on cash flows and pricing as the project switches hands.
One common discussion point surrounds the consideration to be paid when acquiring a project and whether the seller is to be paid for the ROC recycle payments which arise as a result of electricity generated prior the change of ownership. In other words, if the seller generates electricity in May, and the ROC recycle payment isn't actually paid until August, but the project changes hands in June, does that payment belong to the seller or the buyer? If the seller, then does the buyer pay up front on the basis that it will receive the ROC recycle payment later (either on a full value or discounted value basis), or must the seller wait until the payment actually arrives? There is no single correct answer to this and it is fundamentally a point of commercial negotiation as regards the risk (albeit usually a small risk) allocation and impact on cash flows.
If Ofgem were to decentralise the database by using blockchain, this problem could go away. Meter readings could go automatically onto the blockchain, which would automatically and simultaneously update all other copies. An automated process could then issue the correct number of ROCs per MWh of generation into the owner's digital wallet. Similarly, once the ROCs are in the project owner's wallet, they could automatically be transferred to the ROC purchaser, with money going the other way.
Using this mechanism a seller would be certain of exactly what ROC recycle funds were theirs, and what would be the buyer's, right up to the minute. Buyers would very easily be able to carry out their due diligence around generation, as all data and transaction details would be available on one ledger, giving certainty as to pricing and less need for post completion adjustments and deferred consideration.
EV Charging and Battery Storage
There are already a couple of experiments, such as the Brooklyn Project, underway to utilise blockchain technology alongside household solar and battery storage.
The basic concept is that all houses on the street have solar and battery storage installed. The blockchain updates with how much electricity each household has stored. If one household uses up their energy storage, they can then draw the power from their neighbour. The blockchain will automatically update with how much power they have taken, and transfer the appropriate money across simultaneously, negating the need for the middleman utility company.
Whilst this is very much still in its infancy, it will no doubt become important as we move towards the future of electric vehicles. One of the main obstacles to electric vehicles is the strain that millions of cars all charging at the same time would have on the grid. As household and community co-located renewable projects and battery storage become more and more viable, it is looking increasingly likely that decentralised systems will play a major role, and within that a substantial change in the way businesses and consumers purchase their electricity has to follow.
We are already seeing aggregated battery projects which comprise of many individual household batteries, but, thanks to aggregating software (more and more often involving artificial intelligence technology), pool these to act like one big battery, providing electricity to the grid at times of peak demand. Each household is paid for the electricity take, and it is only taken if that householder has consented. This is a model which has a strong track record in countries where household battery storage is common, for example in Germany.
Such use of aggregating technology, combined with those ideas being explored in projects such as the Brooklyn Project, could mean that the fundamental way in which consumers and businesses purchase electricity changes completely – shifting to a more automatic, electronic, process than the current one of estimates and billing.
This is not to say that it is the end of utility companies and electricity suppliers. There will still need to be a wider grid to draw power from, and someone will need to co-ordinate, install, and maintain the equipment. Indeed there is huge potential for businesses to capitalise on the shake-up of the sector, especially given the cost cutting capabilities of electronic electricity supply and power purchase agreements governed by blockchain technology.