energy industry and blockchain: new applications and...
TRANSCRIPT
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Presenting a live 90-minute webinar with interactive Q&A
Energy Industry and Blockchain:
New Applications and Issues for Counsel Distributed Ledger Technology in Energy, Smart Contracts, Regulatory Concerns
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, OCTOBER 17, 2017
Jesse Morris, Principal, Rocky Mountain Institute, Basalt, Colo.
Molly Suda, Partner, K&L Gates, Washington, D.C.
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© Copyright 2017 by K&L Gates LLP. All rights reserved.
Molly Suda, Partner, K&L Gates LLP
October 17, 2017
ENERGIZING THE FUTURE
WITH BLOCKCHAIN
OVERVIEW
Blockchain—what is it?
How is it different from Bitcoin?
What are “smart contracts”?
How do they work in conjunction with blockchain
technology?
Are they enforceable?
How is blockchain technology being applied in
the energy industry?
klgates.com 6
WHAT’S A BLOCKCHAIN?
A FEW OPENING POINTS…
1. Blockchain is a software technology
There is no single “blockchain”
One application of blockchain technology may look
very different than another
2. Blockchain is not Bitcoin
3. Blockchain is not limited to monetary
transactions. Almost anything can be
“tokenized”
klgates.com 8
c2137
WHAT IS BLOCKCHAIN TECHNOLOGY?
a blockchain is a distributed computing architecture
where every network node executes and records the
same transactions, which are grouped into blocks. Only
one block can be added at a time, and every block
contains a mathematical proof that verifies that it follows
in sequence from the previous block. In this way, the
blockchain’s ‘distributed database’ is kept in consensus
across the whole network. – http://www.ethereum.org
Simply put: Blockchain technology allows connected
computers (referred to as nodes) in a network to reach
agreement over shared data on a distributed ledger.
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THE CORE COMPONENTS
1. PEER TO PEER (P2P) NETWORK
The architecture of the network nodes
2. CONSENSUS MECHANISM
How decisions and transactions on the network
are made and verified
3. SHARED LEDGER/DATABASE
How information is stored
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THE P2P NETWORK
All blockchain technology makes use of a P2P network.
Each party to the network represents a “node,” and all nodes
communicate with one another.
The P2P network can be public (open) or private (closed)
depending on the specific application.
Example: Electric vehicle charging app vs. Energy trading exchange
Identity of parties can be protected.
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CONSENSUS MECHANISM
klgates.com 12
• Can be architected to allow nodes to work as a group that can survive and verify
transactions even if some nodes fail.
• “Consensus ensures that the shared ledgers are exact copies, and lowers the
risk of fraudulent transactions, because tampering would have to occur
across many places at exactly the same time.” – IBM Developer Works
• Most common form of consensus mechanism on blockchain networks is “Proof
of Work,” but there are others.
• The mechanism specifies how the nodes
on the network agree on the data that is to
written to the blockchain ledger.
• In other words, how does the network
determine what information should be
considered valid?
SHARED LEDGER
Once transactions or data sets are verified, they are
included in the digital ledger, which is immutable.
Digital ledger exists in the cloud and/or on all nodes in
the blockchain network and keeps track of all
transactions and their integrity (timestamping).
The accessibility of data on the blockchain ledger can be
tailored to meet the specific needs underlying the
blockchain network.
Example: LNG shippers tracking shipments on a blockchain
network have permission to add to/modify the ledger. DOE has
permission to view the ledger, but may not alter it.
klgates.com 13
PUTTING IT ALL TOGETHER…
klgates.com
Ownership transferred from Bob to Alice
Transaction represented to the network as a block
The block is broadcast to all nodes on the network
Nodes on the network work to verify that the transaction is valid (consensus mechanism)
Once verified, the block is added to the chain of all blocks in the ledger to create an immutable record
Bob wants to transfer ownership of a SREC to Alice
14
klgates.com
VIRTUAL
CURRENCY:
BLOCKCHAIN:
Anonymous Transparent
Anonymous
(to unauthorized
parties)
Transparent
Parties
to the Action
Details
of the Action
VIRTUAL CURRENCY vs. BLOCKCHAIN
15
WHAT ARE “SMART CONTRACTS?”
“A set of promises, specified in digital form, including protocols
within which the parties perform on these promises” Nick Szabo,
Smart Contracts: Building Blocks for Digital Markets, 1996
Smart contract code is programmed into the blockchain, “sits”
alongside data stored in the shared ledger, automatically executes
pre-defined actions based on the coding of the contract.
Ex: IF price of electricity as posted by PJM is X, THEN take Y action.
Wide spectrum of how smart contracts could be developed and
implemented
klgates.com 16
Contract entirely in
software code
Combination of smart contract code and more traditional legal language
Traditional, natural language contract
with coded aspects
SMART CONTRACT EXAMPLE
klgates.com 17
POWER PURCHASE AGREEMENT
Art. 1 – Definitions Art. 2 – Terms & Conditions Art. 3 – Obligations Art. 4 – Default & Remedies Art. 5 – Payment Art. 6 – Termination Art. 7 – Force Majeure
Natural Language: “Upon exercise of the Option by Option Buyer, Option Seller will deliver the MW Quantity and Option Buyer will pay the Strike Price.”
Smart Contract Code • Defines relevant terms for Option:
• Strike Price = $40/MW • Option Buyer = Company X • Option Seller = Company Y • MW Quantity = 100 MW
• Function code: • If Message Sender = Option Buyer, and • If Option Seller delivers MW Quantity • Then Option Buyer sends $4000 to
Option Seller
SMART CONTRACT EXAMPLE
klgates.com 18
POWER PURCHASE AGREEMENT
Art. 1 – Definitions Art. 2 – Terms & Conditions Art. 3 – Obligations Art. 4 – Default & Remedies Art. 5 – Payment Art. 6 – Termination Art. 7 – Force Majeure
Natural Language: “Party shall be excused from Performance if prevented from carrying out its obligations because of an event or circumstance which was not anticipated or not within the reasonable control of the Claiming Party. . .”
Smart Contract Code: ???? • Subjective elements that are difficult to
define and translate into code • Difficult to assign a coded triggering
condition
ENFORCEABILITY OF SMART CONTRACTS
Are smart contracts legally binding in the US?
Probably yes, if done correctly
Normal contracting principles apply Is there offer & acceptance, intent, and consideration? An intention
to be bound?
Contract law adapted to digital contracting: E-commerce, shrink-
wrap or click-through agreements
Existing body of electronic signature and records law (e.g., Uniform
Electronic Transactions Act)
State Initiatives Arizona HB 2417 signed into law in April 2017: “A contract relating
to a transaction may not be denied legal effect, validity or
enforceability solely because that contract contains a smart contract
term.”
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ENERGY INDUSTRY APPLICATIONS
BLOCKCHAIN, SMART CONTRACTS AND
ENERGY
klgates.com 21
Applications in the energy industry:
Improving efficiency and liquidity in wholesale energy
and derivatives markets
Facilitating integration of distributed energy resources
(DER), microgrids, and neighbor-to-neighbor energy
trading
Managing electric vehicle (EV) charging
Monitoring critical energy infrastructure
Verifying and managing trade in renewable attributes
Potential legal and regulatory issues
WHOLESALE ENERGY AND DERIVATIVES
MARKETS
klgates.com 22
• Improving back office functions • Counterparty onboarding; KYC compliance • Reduced settlement times
• Creating self-executing smart derivatives
DERS, MICROGRIDS, P2P ENERGY
TRADING
klgates.com 23
• Integration into wholesale energy markets • Role of regulators and local utility
Source : Microgrid Media
ELECTRIC VEHICLE CHARGING
Ensure charging during optimal times to support
the overall grid
Reduce transaction costs and facilitate greater
access and seamless use of charging
infrastructure
klgates.com 24
Source: California ISO
SMART ENERGY INFRASTRUCTURE
klgates.com 25
• Monitoring infrastructure to improve reliability and resiliency
• New business opportunities from data collection
• Cybersecurity issues
TRACKING RENEWABLE ATTRIBUTES
Track RECs and RINs to meet state and federal
renewable goals
Metered data ensures renewable MW or fuel is actually produced
Distributed ledger to enable trading and prevent double-spend
without need for central register
Regulatory reporting and monitoring
klgates.com 26
FRAMEWORK FOR BLOCKCHAIN
ADOPTION
klgates.com 27
AM
OU
NT
OF
CO
MP
LE
XIT
Y A
ND
CO
OR
DIN
AT
ION
HIG
H
SUBSTITUTION TRANSFORMATION
• Smart derivatives
• Online shopping and
e-commerce
• Transactive grid and
peer-to-peer networks
• Napster and Uber
LO
W
SINGLE USE LOCALIZATION
• Utility Billing Systems
• Email on ARPAnet
• Smart energy
infrastructure
• Internal corporate
networks
LOW HIGH
DEGREE OF NOVELTY ADAPTED FROM “TRUTH ABOUT BLOCKCHAIN,” HARVARD BUSINESS REVIEW, MARCO IANSITI AND KARIM R. LAKHANI, JAN-FEB 2017
The Energy Web Foundation Accelerating the adoption of blockchain technology in the energy sector
October 17 2017
30
Presentation Overview
Economic potential of blockchain in energy
Obstacles to adoption
Why the Energy Web Foundation?
31
Diseconomies of scale vs. economies of scale
The economic advantage is shifting
Cost
32
The value should be shifting to the customer
Ratepayer Generation Transmission Distribution
Generation Transmission Distribution Customer
Where the value has been
Where the value will be
33
For that we need a new system architecture
Thousands of participants
Emerging system architecture
kWh $
Utility
Customer
Wholesale
Distribution Edge
kWh $
Millions and potentially billions (IoT) of participants
Legacy system architecture
34
Blockchain enables new sources of value
184 use cases identified to date falling into two broad categories
Source: DENA / ESMT survey of 70 German energy sector executives – Nov 2016
Process improvement (total = 55) Disruptive platforms (total = 52)
13
9
7
6
6
5
5
4
Communication
Grid management
Security
Mobility
Automation
Sales & Marketing
Billing
Metering and data transfer
26
17
9
Transactive energy
P2P Trading
Distributed generation
Additional use cases
• RMI: 27
• GSy: 30
• PWC: 20
Game changer to potential game changer
35
An example of process improvement (1/2)
Certificates of origin today
Renewable Generator
Qualified Reporting Entity
REC Certification Entity
Certificate Tracking System
Annual Audit
Broker Aggregator
OTC Markets
REC Exchange
REC Buyer Renewable Generator
2a
1 2
3
4
5
6
certificates of origin today Trading & Ownership Tracking
Redemption, Retirement, & Reporting
36
Renewable Generator
Certificate Buyer
Certificate of Origin Tracking System
Blockchain
Compliance or Disclosure Entity
Onboarding & Issuance Trading & Ownership Tracking
Redemption & Retirement
Reporting
• Lower transaction costs
• Faster execution (minutes - not weeks)
• Reduced working capital requirements
• Reduced labor
• Increased transparency
• Increased cyber-security
An example of process improvement (2/2)
1 3
2
4
Certificates of origin in the future
37
An example of disruptive platform
• Couperus building in The Hague, the Netherlands
• 300 apartments with digitized heat pumps and on-site water tanks
• Each pump can be controlled by the grid operator – Stedin – to reduce coincidental peaks
• With blockchain-enabled trading agents in each heat pump, customers can “own” their flexibility (cooperating to reduce demand charges, selling flexibility to retailers)
• The same system can be extended to EV charging
38
Presentation Overview
Economic potential of blockchain in energy
Obstacles to adoption
Why the Energy Web Foundation?
39
A number of issues need to be addressed
Issues to address
• Transaction costs
• Large data sets
• Data privacy
Wholesale
Distribution Edge
kWh $
Emerging system architecture Today’s focus
40
Performance – where we are today
Number of transactions per second
56,000
450
20
4
41
Performance – why it is a problem
Existing blockchains cannot support commercial applications
Scale
Time to execute
Where we are today with blockchain technology
Proof of concept Commercial
42
Performance – How do we go there?
Existing blockchains cannot support commercial applications
Scale
Time to execute
Proof of concept Commercial
Where we need to be
43
Presentation Overview
Economic potential of blockchain in energy
Obstacles to adoption
Why the Energy Web Foundation?
44
Our core beliefs to promote adoption
Leverage the best technical talent
Focus infrastructure on application needs
1
2
3
Create an open source core infrastructure
Promote an ecosystem of users 4
45
Criteria Smart contract capability
Path to scalability
Open access
Open source (GPL v3)
Permissioned validation
Capable of confidentiality
Used by ecosystem
Tested at scale
EWF Blockchain
Ethereum
Bitcoin
Hyperledger
? ?
IOTA
Tendermint
= meets criteria = does not meet criteria *via public ethereum blockchain
* *
Leverage the best technical talent
46
Criteria Smart contract capability
Path to scalability
Open access
Open source (GPL v3)
Permissioned validation
Capable of confidentiality
Used by ecosystem
Tested at scale
EWF Blockchain
Ethereum
Bitcoin
Hyperledger
? ?
IOTA
Tendermint
= meets criteria = does not meet criteria *via public ethereum blockchain
* *
The ethereum blockchain is closest to meeting our criteria in the energy sector and a natural starting point
Leverage the best technical talent
47
Create an open source infrastructure
Hydro Wind Solar
DERs Dist. Networks Coal
Gas Nuclear
Blockchain (core and additional functionalities)
Application
Blockchain infrastructure
Device interface
• Proprietary • For profit • “Easy”
Certificates of Origin
Transactive Energy …
EV Management
• Open source • Not-for-profit • “Difficult”
… …
48
ARK Equities
Focus infrastructure on application needs
EWF Affiliates as of Oct 3, 2017
49
Promote an ecosystem of users
~100 energy blockchain startups will benefit from the EWF infrastructure
50
EWF Time Table
Affiliate recruiting
• Round A – Feb-May ‘17
• Round B – Sep ’17 – May ‘18
Event Horizon Conferences ”Go live”
• Vienna – Feb ‘17
• Berlin – April ‘18
• “Launch” – H1 ‘19
• H1 2019 (est.)
• Commercial start date
• Token generation event
Development (May ‘17 – H1 ‘19)
• Use case task forces
• Technical development
Releases and test (Nov ‘17 – H1 ’19)
• Additional functionality
• Application testing and feedback from task forces
