Blockchain technology offers cost-saving and process efficiencies for the energy sector that are too compelling to ignore, write Luis Colasante and Taniga Krish for Oilprice.com. But it does require a clear framework where all participants agree on the standards and rules.
Commodity and energy trading houses have proven that they can adapt their business model in an economy that imposes more capital requirements and regulations every day. These companies have invested millions of dollars in the last decade to build efficient systems for their regulatory requirements and key risks.
Today, a new technology, blockchain, is shaping the commodity market, making it more efficient with reduced transaction costs.
Blockchain is a disruptive technology that allows storing data without the need for a central authority, implying that financial transactions will no longer be stored in a central database but distributed to several other computers that store data locally. For this reason, this technology is called distributed ledger technology (DLT). Each transaction is recorded and added to the previous one, resulting in a growing chain of information.
Blockchain is a buzzword in the financial industry, and it’s slowly captivating the trading floor, as well as the power and utilities sector, which is tiptoeing to disrupt the centralized business model approach based on legacy systems.
Based on a platform and network-based approach, the DLT system can be adapted to a specific business case, with characteristics ensuring security and disintermediation at a rapid pace. It features reduced operating costs, but there are certain limitations.
The integration of renewable energy in the energy mix is a major preoccupation of every country, and blockchain would simplify the decentralized electricity network among individuals along with their platform and networking capabilities.
In the oil and gas sector, the use of blockchain technology is still in its nascent form, with pilot projects happening in European gas trading for faster transactions with reduced costs.
Due to blockchain developments in the financial industry, power producers and the utilities sector can also embrace this technology. Some principal assumptions used in the financial sector can be applied to the energy sector, like the decentralized storage of transaction data. New decentralized business models no longer require third-party intermediaries, with payments being done via cryptocurrencies. With the transactions being governed by smart contracts, funding and automatic payments are imitated with a sequence of approvals, without requiring a letter of credit, thus eliminating the delay time.
The most relevant difference between the energy sector and the financial industry is the final product itself (in this case the electricity/electron), which must also be taken into account because it needs to be transported and distributed via the network infrastructure.
One of the exciting initiatives making headlines is Energimine, which aims to reduce global energy consumption by encouraging individuals with energy tokens to use their platform for a peer-to-peer marketplace to buy and sell energy and a reward platform.
Blockchain technology shows great potential, and can be used not only to execute energy supply transactions, but also to create the basis for clearing processes, metering, billing, application in the documentation of ownership, the state of asset, renewable energy and white certificates, guarantees of origin and emission allowances.
For the full deployment of this technology, it’s necessary to have a clear framework where all participants agree on predefined rules based on common standards.
The potential cost-saving and process efficiencies are too compelling to ignore. Some energy companies have calculated the savings to the tune of 30 to 60 percent on their structural costs. These savings come mainly from reduced labor costs, reduced manual and semi-automated process-related efforts, reduced capital costs through faster settlements, and reduced technology costs by reducing the dependency on multiple systems.
Blockchain technology will be the accelerator of the world energy transition, helping to have a decarbonized and decentralized energy system that will be more resilient and cost-effective.