By Alex Bausch
Tokenization is at the heart of the digitization of infrastructure for several industries. It is the oil for a digitized society with the potential of disruptive social opportunities. These opportunities are seen, among other things, in the field of energy, more specifically for a 'flexible and sustainable energy system.' Part of this is the search for (i) a system in which 'energy data' becomes more widely available, while at the same time the end-user (ii) retains control of his data and (iii) has control over who has access to his data. Tokenization of traditional financial instruments is also expected to open up opportunities for efficiency improvements across the entire trade and post-trade value chain, contributing to more efficient risk management and pricing. The clean energy economy is booming globally. Leading the decarbonization charge is solar. Solar photovoltaic (PV) panels and battery storage technology are improving rapidly in both efficiency and cost of production.
This combined innovation & production learning curves (both Wright's Law and Swanson's Law) combine to accelerate a global solar-powered energy transformation
Part of the growing green economy is the global network of carbon trading and clean energy schemes that support clean energy production such as solar. Organizations such as Markit offer a "Global Carbon Index, [which] is the first benchmarking and liquid investable index to track carbon credits markets globally.". However, energy consumers and traders presently have difficulties distinguishing between green (renewable) energy vs brown (fossil fuel) energy.
That's where Blockchain comes to the rescue. Blockchain technology enables secure and reliable ways to transfer valuables by means of digital tokens. In its most basic form, the technology is a tool that allows storing and sharing a digital database that contains an expanding log of digital transactions, data records or any other form of data. Such trades are aggregated into blocks, where each block is time-stamped, immutable, traceable, and cryptographically linked to previous blocks, thus forming a chain of blocks or blockchain. In a token economy, the following three functionalities matter most:
- Tamper-proof properties of the blockchain data structure for state storage, specifically to securely store the market-clearing results computed in the market layer.
- Represent assets of (monetary) value in the form of digital tokens on the blockchain. This process is called tokenization and has seen an increasing adoption over the past few years.
- Leverage blockchain technology to automatically and securely transfer digital tokens when the energy traded is delivered or consumed.
In line with the token taxonomy framework, the token definition prescribes the data that a token holds and its allowed behaviour to be implemented as smart contracts on the blockchain. Using a token definition provides the opportunity to abstract away from the complexity of energy and grid physics, making way to create new business models by lowering the barrier to enter the energy eco-system.
Peer-to-peer energy exchange brings certain benefits to all stakeholders. On the demand side, providers/consumers (prosumers) are given the opportunity to engage in a decentralized form of energy exchange without the need for a "trusted" middleman. For example, they can act as sellers when they have energy production surplus from their solar panels, as buyers to charge their electric vehicles (EVs), or both if they have stand-alone batteries. For society as a whole, peer-to-peer energy exchange promotes renewable energy integration by incentivizing prosumers to invest in local distributed energy resources (DERs) or by encouraging consumers to purchase green energy certificates, ensuring they consume only green energy.
Peer-to-Peer (P2P) energy exchange, which allows energy consumers and producers to exchange/trade with each other directly, is the paradigm that will drive the digitization of the energy supply chain. With the advent of decentralized ledgers and blockchain technology, the industry has discovered new ways of digitization of the energy supply chain will evolve, which will give rise to socio-economic benefits for energy systems.
Despite such prospects in energy systems, three key challenges might hinder the full integration of P2P energy trading and blockchain:
- It can be tenuous & complicated to design a decentralized P2P market that keeps a fair balance between economic efficiency and information privacy, and stakeholder fairness.
- With the proliferation of storage devices, new P2P market designs are needed to account for their inter-temporal dependencies and inefficiencies
- A practical implementation of Blockchain technology for P2P trading is required, facilitating efficient trading in a secure and fraud-resilient way while eliminating intermediaries' costs
In addition to the above challenges, certain operational & legal barriers must be levered to reach the full potential of P2P energy trading. One of these challenges is that peer-2-peer markets require decoupling of regulations, such as a regulatory sandbox to ensure fairness and define market players' legal boundaries and their eligibility for taxing and network usage tariffs. Also, it is difficult to differentiate between energy traded from/to the grid and in the peer-2-peer market from a technical aspect. This can be alleviated by introducing crypto anchors, networked smart meters and sub-meters, albeit only when there is a highly secured decentralized database for P2P transactions.
Energy grids will have to play a crucial role in building a more sustainable economy and powering future traffic systems. Current grid infrastructure is limited by design for one-way energy and value flows. Energy companies will need to develop new value-added services for their customers around smart homes, e-mobility and smart buildings, and new touchpoints. The combination of Blockchain technology and cryptography helps overcome some of these limitations and creates the opportunity for new business models - especially at the inflexion point where measuring energy consumption and automated settlement are coming together in the future.
The 2Tokens Foundation is currently exploring how tokenization can help gain a better insight into the challenges around the implications on legal and regulatory, technology, and taxonomy in the renewable energy sector. The Tokenization of Energy use-case will accelerate the energy transition in line with the ambition of the EU commission to reduce the carbon and emission footprint. It will do so by looking into the best way of tokenizing the energy trade market. This use case is developed together with IBM, Catena Investments, Rabobank, CMS, Port of Rotterdam [BlockLab], RSM Erasmus University, Enexis, and SUNIFIED Group BV. Sign up for the webinar on the use-case Energy Token here.
2Tokens is a foundation that formulates a guide, as part of a larger vision, for any type of organization that wishes to leverage tokens & tokenization. It aims to come to a shared understanding of token finance. It is a public interest initiative supported by a diverse community of technology companies, policymakers, financial advisors, banks, legal and regulatory experts, and academia.
Published by Digital bytes - April 2021
Esmat, A., M de Vos, Y Ghiassi-Farrokhfal, Palensky, P., and Epema, D., “A Novel Decentralized Platform for Peer-to-Peer Energy Trading Market with Blockchain Technology”, Applied Energy, Jan. 2020.URL: hdl.handle.net/1765/131130
V. S. K. Balagurusamy et al., "Crypto anchors," in IBM Journal of Research and Development, vol. 63, no. 2/3, pp. 4:1-4:12, March-May 2019, doi: 10.1147/JRD.2019.2900651. URL: https://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=8645638&isnumber=8769983.