For various reasons, energy trading can be rather tedious and complicated for traders and energy investors. So, as always, technology can be used to make the process simpler for everyone involved. The inclusion of blockchain in energy trading promises to bring wholesale improvements to the field.
In simple terms, energy trading is defined as the buying and selling of energy-producing commodities such as crude oil, natural gas and a few others in a financial market. Essentially, this means that energy generators can be bought or sold like any other commodity—such as gold, silver, and others.
However, as we know, our daily existence still heavily depends on an uninterrupted supply of energy products. Additionally, the demand and supply of energy products dictate their global prices. Therefore, energy trading carries additional significance, especially in today’s scarcity-ridden times.
Energy commodities are traded in the form of ‘energy derivatives’—contracts based on underlying assets such as crude oil, petroleum, amongst others. Such contracts are used for trade in the form of options, swaps, futures, forwards and swaptions. The derivatives are traded in public commodity exchanges such as the New York Mercantile Exchange (NYMEX) or Euronext.
So, where does blockchain fit into this? Long earmarked to be the technology that is here to stay and revolutionize various industries with its amazing capabilities, blockchain in energy trading can be impactful in several ways, some of which are listed below:
Automating Seller-Buyer Relations
As we know, blockchain, basically a decentralized ledger-based application, is generally used to record and preserve financial transactions between multiple entities. However, it can be used in a multitude of other ways too. One of those ways is a ‘smart contract.’ A smart contract is a digital contract that is recorded and stored permanently in a blockchain. The clauses in the contract can be configured to be activated to execute specific actions when certain predefined conditions are satisfied. As a result, such blockchain-enabled contracts combined with digital payments allow buyers and sellers in the energy trade market to automate their relationships. In order to take the automation to the next level in case of payment-upon-delivery processes, the smart contracts, stored on blockchain systems, can be linked to temporary escrow payment accounts.
Smart contracts can register details such as prices—receivable or payable—and dates related to energy trade transactions. These details are stored in the blockchain, and smart contracts will be enforced once certain payment and delivery criteria are met. Blockchain systems used for energy trading enable a smooth relationship between buyers and sellers during trade and are hugely useful to eliminate any geographical or other inconveniences.
Smart contracts provide several benefits in energy trading, such as:
- They can facilitate the buying and selling of assets other than value or cryptocurrency.
- They allow the specification of rules for blockchain systems to operate.
- They enable the execution of transfer policies for assets in the decentralized blockchain network.
- They add configurability and intelligence to a blockchain system.
Automation of the buyer-seller relationship is a big reason why the presence of blockchain in energy trading should always be there.
Reducing Transactional Costs
Energy trading may be expensive due to several reasons. One of the main reasons is the presence of intermediaries in a transaction process. Blockchain systems eliminate that problem as trade confirmations as well as payments can be carried out through smart contracts, and unnecessary intermediaries are phased out of the process. Generally, a large percentage of trade costs—such as trade record keeping, audits and trade verifications—are associated with such intermediaries. Therefore, with their involvement gradually reduced, the overall trade expenses will do the same as well.
As we know, time is just as valuable as money. As stated earlier, the involvement of blockchain in energy trading takes a third-party facilitator out of the equation. So, international and local transactions for energy trading can be completed in much lesser time with blockchain’s involvement, even for overseas payments.
Ensuring Cybersecurity in P2P Energy Trading
Peer-to-peer electricity or energy trading is defined as the transaction of energy between multiple grid-connected parties. Usually, the excess energy generated is transferred via a secure platform to other users in the form of solar energy. Peer-to-peer, or P2P energy trading, allows consumers to choose where they will be ‘buying’ electricity from, and where and who they will be selling it to.
Blockchain systems can be used as a possible solution for setting up P2P electricity trading between multiple users. Generally, blockchain-based systems offer high levels of data security and transparency, which make them an ideal candidate for carrying out P2P trading in the electricity market.
The distributed-ledger technology provides scalability to participants in P2P electricity trading. On the other hand, cyberattacks are prevented in the systems in which such transactions are carried out due to the absence of a central server that is generally the target of attack by cybercriminals. Generally, normal P2P energy trading falls victim to double-spending attacks and Denial-of-Service (DOS) attacks. The introduction of blockchain in energy trading introduces a layer of protective coating on P2P energy trading transactions.
Apart from double-spending attacks, P2P energy trading portals could also face data-diddling attacks. In such an attack, an attacker compromises the data integrity of the system and alters the information. The presence of blockchain in the mix prevents this kind of attack as the information is stored in its cryptographically hashed block linkage.
Generally, ‘prosumers‘ (an individual who consumes as well as produces goods and commodities) and consumers communicate with each other before P2P energy trading in order to negotiate prices. Blockchain prevents the likelihood of a DOS attack along the channel of this communication. Additionally, to be 100 percent secure, each transaction in a blockchain-governed P2P energy trade undergoes thorough validation. This provides an invaluable second layer of protection from a DOS attack.
Privacy attacks during P2P energy trading are also a dreadful possibility. Generally, participants in P2P trading are needed to make multiple transactions wherein they pay and receive money to buy or sell energy. A privacy attack threatens to reveal the identity of both parties on a conventional digital platform. Here again, a blockchain system’s cryptographic elements protect the identity of users and maintain their privacy during transactions.
The setting up of blockchain for P2P electricity trading requires the miners’ fees (for carrying out the Proof of Work, or PoW) to be paid by the participants involved in the transactions. Despite the presence of this operating cost, using blockchain technology is a much more cost-effective alternative to involving regular traders, agents and brokers. However, while blockchain systems improve the P2P energy trading process to such an extent, they do have a few drawbacks.
The involvement of blockchain in energy trading for P2P energy is primarily used for recording some transactions in its blocks. The transactions are related to:
- a) Energy or electricity generated by prosumers
- b) Bid prices demanded by prosumers for the energy
- c) Energy demands made by consumers
- d) Maximum prices at which they wish to buy energy units
These details, collected by blockchain systems and transmitted by smart meters, are exchanged on a platform that does not necessitate the presence of intermediate agents between the trading parties. All in all, the inclusion of blockchain in energy trading boosts speed, maintains foolproof cybersecurity and, as a result, makes the process of P2P energy transmission smoother and more efficient.
Automating Post-Trade Events
Apart from safeguarding transactions and other elements of energy trading from cyberattacks, blockchain is useful to automate post-trade activities as well for energy traders in the market. The use of blockchain in energy trading and smart contracts reduces operational risks and provides quicker trade settlements for the parties involved in a transaction.
As stated earlier, blockchain-induced automation is useful to save time for all the players involved in energy trade transactions. For instance, blockchain systems allow financial institutions to settle securities in a few minutes instead of the days or weeks that they would normally take. So, essentially, blockchain offers real-time security settlements for such parties apart from improving market liquidity and injecting transparency in an energy trade transaction.
As a matter of fact, blockchain can not only provide the above-mentioned host of benefits for energy trading but for normal commodity trading too. Applications of blockchain systems, such as smart contracts and smart meters, have a huge future in the energy market.
As always, implementing a new-ish technology such as blockchain in energy trade will come with its own set of challenges. Organizations need to research well and find solutions to overcome possible legal and regulatory hurdles standing in the way of blockchain implementation because that will influence the speed with which they can incorporate the technology in their daily functioning.
