Blockchain enablers and roadblocks

We recap the key advantages and disadvantages of blockchain tehcnologies. We then discuss to what extent blockchain can support or subvert business models in the transitioning electricity systems and markets. We reflect on regulatory, legal and socio-economic actions fostering the blockchain deployment. We describe the EU's blockchain strategy with its main legislative proposals and actions.

We have seen that blockchain can enable power system innovation but of course it is just one of the means. Its main potential advantages include lower transaction costs, and higher transparency/visibility, immutability, disintermediation and (cyber)security.

Nonetheless blockchain is a tool that can be used to accelerate the energy transition and is not a goal in itself.

The policy and legislative initiatives on blockchains are moving their first but quick steps, worldwide and in the EU, with the financial sector being the most targeted due to the high interest concentrated on crypto currencies and their potentially disruptive effects on the banking and transactive economic sectors.

The regulations and policy actions on digital finance/blockchain represent an important reference for the energy system digitalisation as well, since financial transactions are at the core of the energy market operations and certain mechanisms aimed at promoting legal certainty and support innovation in the financial sector can well be borrowed and applied to the energy sector.

Blockchain promises to be a technology enabling sustainability in at least three fields:

Climate change (supporting the Europe’s Green New Deal)
Green and sustainable energy (supporting local peer-to-peer energy markets)
Circular economy (supporting new transaction platforms)

The EU blockchain strategy includes the following legislative proposals and actions:

The Regulation proposal on Markets in Crypto-assets. This proposal is part of a Digital Finance package aimed to further enable and support innovation and competition in the financial sector while mitigating the risks.
The Regulation proposal on a pilot regime for market infrastructures based on distributed ledger technology. This proposal, besides introducing legal certainty and ensuring financial stability, aims to: support innovation, by removing obstacles to the application of new technologies in the financial sector and by promoting the uptake of technology and responsible innovation via a pilot regime.
A joint statement of the European Commission and the European Central Bank to explore the possibility of issuing a digital euro, as a complement to cash and payment solutions supplied by the private sector.

Furthermore the strategy includes partnership and infrastructure development initiatives:

Developing joint visions and initiatives through a European Blockchain Partnership harnessing national blockchain efforts into a pan-European approach.
Financing the European Blockchain Services Infrastructure (EBSI). The EBSI is a network of distributed nodes across Europe aimed to deliver cross-border public services and enhance the way citizens, governments and businesses interact.
Interacting with the community via the International Association for Trusted Blockchain Applications (INATBA), a multilateral public private partnership which brings together governmental representatives and international organisations with industry and academia and via the European Blockchain Observatory and Forum, monitoring blockchain initiatives in Europe and globally.

Finally the strategy foresees:

Increasing funding for blockchain research and innovation, both in the form of grants and by supporting investment in start-ups.
Proposing a regulatory sandbox with blockchains in the financial, energy and other sectors (expected to become operational in 2021/22).
Supporting interoperability and standards adoption. The EU is involved in the work of international standard organisations and is engaging with global bodies.
Promoting blockchain education and skills development.

The blockchain challenges and some related actions to address them are described below:

SECURITY

Even if blockchain is endowed with robust security features (inter alia transaction encryption and time stamping, absence of a central point of failure), its security may be still be challenged - even more so as selected blockchain solutions become mainstream - in several respects.

As far as cyber security is concerned, people may become a key point of failure (e.g. due to poor private key management).

Quantum computing solutions - if the blockchain technology does not evolve accordingly - may jeopardise public-key cryptography.

Asset Visibility: How accurately do the stored and transacted data (i.e. RES energy certificates) represent the real ones (renewable energy)?

With specific reference to power system operations, to what extent can a complex power system be run supplanting human decisions with a “virtual” blockchain?

SCALABILITY

Scalability has to do with blockchain network's capability to handle a higher number of transactions and nodes/participants with an adequate speed. The choice of the right, scalable blockchain technology is key. Currently, there are no public permissionless blockchains fully mature and suitable for energy use cases. Most of the solutions tested in the energy field are based on Ethereum but the technology looks still too slow (with limited transaction throughput) and costly.

Another important balance to strike is between the pace of technical innovation and both the security and scalability properties of blockchain solutions.

PRIVACY & IDENTITY

How to deliver user experience while respecting individual privacy and identity? It seems challenging to interpret some of the authentication and protection regulations in blockchain environments, which enable radical decentralisation of data storage and processing.

As an example, in the existing blockchain, once a user identity is created, there is little guarantee that the user requesting the identity is the correct owner of that identity and not a malicious one. So, maintaining a strong authentication scheme is one of the priorities for the blockchain technology which needs more research and efforts.

Furthermore, as far as privacy & data protection are concerned, how the right to be forgotten can be fulfilled? How to balance privacy versus confidentiality?

LIABILITY & MARKETS

Who is actually responsible for payment settlement/defaults, tampering or blackouts? It is unclear who bears legal and technical responsibility for the blockchain when there are security breaches - e.g. loss of keys, errors in blockchain updates, smart contract malfunction - and other unforeseen events, such as payment defaults, technical failures or intentional tampering.

Since there is no authority in the case of disputes and conflicts and since the energy supply business usually involves use of critical infrastructure, a clear emergency plan is required to define the procedures to be followed in the event of system failures.

Are all consumers/prosumers going to be legally recognised as traders? Who will be responsible for ensuring that financial transactions (especially payments for obligations arising under supply contracts) are properly settled? It would probably not be possible to impose such an obligation on energy consumers themselves, maybe not even on their energy suppliers (an actual responsible entity, e.g. a platform operator, might be needed).

How to make a contract of a smart contract? How to design a market (i.e. for flexibility services) not discriminating market actors? Member States shall establish consistent and harmonised regulatory frameworks to allow the participation of independent aggregators to electricity markets according to a level playing field.

DATA ACCESS

Non-discriminatory procedures and interoperability requirements are needed for accessing metering data, consumption data, as well as data required for customer switching, demand response and other services.

In the context of the energy transition, a strong requirement is the construction of a data framework for handling, processing and governance of all energy-related data.

Customers access to metering data is essential to allow them to benefit from competition in the retail electricity markets as well as to engage in more sophisticated activities such as the provision of flexibility services

How to access and use data stored on a blockchain to generate an invoice or trigger a smart contract? It will be important to have the legal ability to use data stored on a blockchain to generate an invoice. Currently in most of Europe (e.g. France), by law only the consumption data coming from the Distribution System Operator can be used. Currently it is not legally possible to take data from a blockchain and use it to trigger a smart contract.

INTEROPERABILITY & STANDARDS

Setting standards and ensuring the long-term interoperability of blockchain-enabled devices (appliances, thermostats, electrical meters, distributed generation equipment, etc.) with other devices, might help with the development of markets for demand response and DER and other power sector objectives.

Establishing standards for interoperability across industries will also be critically important as the power sector becomes more coupled with adjacent sectors such as the transportation, heating, and others.

How to ensure interoperability of different (e.g. blockchain on- and off-chain, smart metering) systems? How to make blockchain-ready smart meters ?

How to balance technical innovation with interoperability of solutions?

SUSTAINABILITY

The transition to the zero-carbon society, promoted by the Paris Agreement and the European Green Deal, can create the largest market on earth.

Blockchain can be used for tokenisation, creating digital assets not just for payments or to identify stakeholders in a network or contributions to an energy marketplace, but also to create tradable digital assets out of climate change outcomes.

As mentioned, most of the solutions are based on Ethereum and the technology used to be rather energy intensive as originally based on proof-of-work validation mechanism (in late 2021 however Ethereum started switching to more energy efficient proof-of-stake validation).

How to ensure that the increasing transaction volume requirements of all expected use cases can be supported while reducing the environmental footprint?
How can the blockchain technology contribute to meet the EU’s objectives to become climate neutral by 2050?

FAIRNESS & ACCEPTANCE

Fairness and equity will be important considerations in P2P energy markets. Fairness towards people and businesses are equally important: as an example, there should be non-discriminatory participation of independent aggregators in electricity markets at the level playing field with other market operators (electricity suppliers shall avoid practices preventing customers to stipulate contracts with independent aggregators).

How to democratise energy if many users cannot (afford to) be on board? How to engage consumers, not just those with a solar panel on the roof?

Currently consumers, beyond the initial phase of interest, are not deeply engaged in digital energy projects. Properly evaluating and managing from the beginning the consumer's expectations and needs turned out as an effective strategy (in R&I projects or commercially viable startups) to engage consumers.

ALL REFERENCES FOR 4.BLOCKCHAIN ENABLERS & ROADBLOCKS