Blockchain: Opportunities for the energy industry

Much has been said about digitalisation in the energy industry and the transformative and disruptive effect that technology will continue to have across the value chain. Indeed, for those that understand the promise of new technologies such as blockchain, smart contracts, artificial intelligence and internet-of-things (IoT), it is not difficult to envisage a future where each drop of oil, unit of natural gas and charged ion will be traceable from inception to consumption.

At the core of this future is blockchain (also, and more correctly, referred to as distributed ledger technology or "DLT"). Blockchain technology utilises advanced cryptographic methods to securely validate, store and transmit information across a network. That information is captured and shared in such a way that all network participants have access to an unaltered and auditable view of the same information being updated in real-time. Moreover, the robustness of the security methods employed mean that so-called trusted intermediaries are no longer necessary, and no longer need to act as gatekeepers (or roadblocks) for transactions.

Proponents tout that blockchain technology will not only enable parties to transact faster and more directly with one another, but that it will eliminate manual and redundant processes, reducing the risk of error, fraud and costly dispute resolution, and increasing transparency and costs savings. The potential use cases are numerous and have been posited by many observers both within and outside of the industry. However, the current reality is that most blockchain technology applications for the energy industry are very much still in the proof-of-concept stage. End-to-end adoption is several years off and will be reliant on the maturation of other aspects of digitalisation — not least a change in mind-set among industry participants.

So where do the real opportunities lie for businesses in the energy industry looking to capitalise on blockchain technology trends now?

Corporate venturing

One of the fastest ways for businesses to capitalise on blockchain technology is through direct investment. Corporate venturing is on the rise, with the likes of Centrica, BP, Statoil, ENGIE and Tokyo Electric Power investing in blockchain-based projects both on their own and alongside more traditional venture capital funds, as well as governments.

Through corporate venturing, businesses may be able to reap the benefits of having immediate access to the bleeding edge of technology without having to up-end their existing business. Growing organically can take too long and acquisitions carry certain risks. Corporate venture investment offers a middle path that businesses and, more importantly, boards are more readily willing to tread.

However, investment in a blockchain-based project is not necessarily the best or right action to take. Corporate venture arms should have clear investment criteria. While they may not have an expectation of the same level of returns as their traditional venture capital counterparts, it is an investment nonetheless and there should be the potential for returns (whether financially, commercially or both).

And, naturally, there is no substitute for proper due diligence. It is essential to have advisers with the right blend of legal, commercial and technical experience in relation to the specific nuances and issues that may arise in relation to blockchain technology.

Consortia

Interest in understanding blockchain has in particular fuelled the rise of consortia of industry participants looking to leverage the advantages of group learning. In addition to sharing knowledge and know-how about how blockchain technology works, consortium members are able to collaborate on proof-of-concept projects. To date these have included a commodities trading platform (BP, Shell and Statoil), a petroleum supply chain management platform (e.g. Petroteq, EPMEX and SOCAR Energy) and an energy asset marketplace (e.g. Electron, Statkraft, Shell, Northern Powergird and EDF Energy).

Joining a consortium is a good option for businesses looking for a more hands-on and collaborative approach, even if they are new to blockchain technology. However, participants should be clear as to what membership affords them, what goals they are looking to achieve, and be willing to commit sufficient resources (from a time, cost and personnel perspective) to any projects. Deriving value from consortium membership is as much a question of what a member is willing to put in as what it is seeking to get out.

Increased collaboration by businesses which may be (or be seen as) competitors also raises questions of competition law that need to be carefully navigated. Competent authorities have recently started to focus on the potential anti-competitive effects of having access to large data pools. Blockchain technology is underpinned by the concept of having access to a permanent and growing data pool and, so, if competitors are working together to share such data it may raise questions.

Joint ventures and strategic partnerships

Businesses aiming to utilise blockchain technology in a more proprietary manner may seek to implement their project by partnering with one or more other businesses, either through a joint venture and/or, increasingly, a strategic commercial partnership. For newer entrants in the industry, who may be more familiar with blockchain technology, partnerships can provide much needed access to the deep industry knowledge, regulatory connections and infrastructure of long-time players. For industry incumbents, this can provide the access to and expertise in blockchain technology that they have not yet cultivated in-house.

Through partnership, whether legal or commercial, businesses can leverage the expertise of their partners to bring their blockchain-based projects to fruition more quickly and with less investment than might be required if they had to develop or acquire the necessary expertise and experience on their own. For example, LO3 Energy, a joint venture among Centrica, Siemens and Braemar Energy Ventures, teamed up with leading blockchain technology company, Consensys, to form TransActiveGrid, which has developed one of the first and most well-known energy industry blockchain projects, the Brooklyn Microgrid. The project started in early 2015 with the first transaction being the trading of solar power within a community in Brooklyn, which took place in April 2016¹.

There is a sliding scale as to how formal the partnership will be, and deciding the best form of the partnership requires careful consideration. Regardless the form, partner relationships can be complex. All parties need to be clear as to how the governance of both the relationship and the project will work in order for it to succeed, and the resulting legal documentation needs to reflect this.

Conclusion

There is nothing to fear in the technological change affecting the energy industry. This change is still in its earliest stages and there is much to be learned by incumbents and new entrants alike. The challenges to being able to capitalise on blockchain technology are far from insurmountable. By finding ways to get access and exposure to blockchain technology and its myriad of uses, businesses in the industry will be better prepared to adapt, adopt and, ultimately, evolve.