Since 1975

The ECT Centre of Technology

Accredited Professional Body for Education
Engineering - Management - Finance

Opportunities in Blockchain: Renewable Energy and Environmental Trading

A knowledge of Blockchain Technology is highly desirable for Energy professionals looking to diversify their skills to include new financial technologies, cryptocurrency and bitcoin.

Click here for more information on the ECT’s 2-day intensive course.

DLT P2P Energy and Environmental trading

Distributed Ledger Technology – Background

BlockchainDLT is a protocol for building a replicated and shared electronic ledger system, collectively maintained by the participants in that system or network, rather than by one central party. In a DLT system, each network participant constitutes a ‘node’ or, more exactly, the nodes comprise the individual participants’ computers, each of which contains a complete set of transaction records (i.e., the ledger). Taken together, the nodes constitute and maintain the distributed ledger.

The ledger is organised as a chain of “blocks” of information – each block contains a collection of transactions. New transactions are collected to form a new block and are submitted for adding to the ledger. Hence a new block contains one or more new transactions. The adding of blocks (hence the building of the ‘blockchain’) means that the ledger grows cumulatively. Transaction information is thus exchanged between nodes and added as a new ledger entry to the computers of all participants. The ledger, so understood, is updated whenever a transaction takes place. This involves two steps:

  • ‘validation’ of each transaction: certain nodes, so called ‘validating nodes’ (possibly, but not necessarily, all the nodes in a given system, depending on how the network has been established) perform a validation check of every transaction in the entire block of transactions to ensure that the contents of each transaction are legitimate; e.g., they must verify that the sender of a transaction is true owner of the asset being sold;
  • ‘broadcast and consensus’: when a validating node has validated one or more transactions and initiates the process of adding the transaction data to the ledger, it broadcasts information about this new block to other validating nodes. The validating nodes communicate amongst themselves and agree upon a common set of validated transactions to be added to ledger.

A DLT network may be established either as a “permissionless” network, in other words, one which anyone is free to join, or as a “permissioned” network, one which is usually privately owned, or at least set up by a collaboration of parties, so that only trusted or vetted participants can participate in control and maintenance.

The robustness of DLT in protecting the integrity of information is due, at the macro-level, to high-level design, and at the micro-level, to detailed technicalities and specific security arrangements. In addition, the high level of transparency and duplication or replication of records provides a certain buffer against fraud, hacking and other possible abuse or corruption.   The system is not however without its vulnerabilities as various thefts of payments for eg Bitcoin have shown.  Hence we are developing our own API and webfront to protect our pricing algorithm (see below).

At the macro level, the consensus process amongst validating nodes, described above, protects integrity; at the micro level, “hash” technology is applied. As noted, the distributed ledger is a chain of blocks in which the validated transactions are added sequentially to the ledger. The blocks in the chain are connected with electronic links built with what is called a “hash function”, a one-way mathematical function that summarises a piece of data regardless of its size as a piece of unique, fixed-size, short data called its “hash value”. Put another way, the hash function turns data into a trunk of random characters called “hash”. Any alteration whatsoever to the data causes the hash value to change. It then becomes impossible to derive the original data from the hash. Any attempt to change the content of a block in the chain causes the value of its hash link to be changed as well. Thus, the link of a block in the blockchain is integrally tied to its content. This technological facet is a further barrier to abuse or corruption of network data.

DLT application for energy and environmental assets

Many  energy and climate related coins have already been launched.   Thus there already is the beginnings of a market in trading such coins.  Building on this emerging market, the Blockchain for the Renewable Energy Industry course will look at token trading relating to:

  • energy (principally oil, gas, electricity in a national market and specifically but not exclusively renewable electricity and biogas)
  • emissions reductions, being voluntary or compliance carbon credits or emissions allowances

and:

  • trading of energy and emissions token crosses
  • trading of tokens against fiat currencies

aimed at providing greater depth, liquidity and also price discovery.  The course will look at the use of proprietary pricing algorithm, to allow traders of such tokens greater price certainty as to what the market value of that token should be given the higher level accuracy of the forward estimation of the market price of the underlying asset (barrel of oil, cubic meter of gas, kWh of electricity, price of a carbon credit).

The process for achieving the distributed consensus, described above, on a permissionless DLT network is called “mining” and will not be considered on the course, as the platform does not rely upon mining, which is a computationally and energy-intensive process. Rather:

  • independent certifiers certify the underlying
  • validating nodes simply check the validity of a transaction
  • ledgers are updated much faster, and more energy-efficiently (as compared to the process using mining).

As each node holds a local copy of the ledger that should contain a complete set of transactions to date, each validating node just needs to check its own chain and record history in order to ensure the validity of the transaction.

Energy tokens

The Blockchain for the Renewable Energy Industry course will consider the concept of ‘utility value’ and the emerging regulatory position in the UK as being developed by the FCA.   It will also consider as an example of an alternative the Gibraltar Blockchain Law.

In the context of ‘utility value’ the course will look at kWhs of renewable electricity which a company (typically via project SPVs) can contract to sell under PPAs to offtakers (whether consumers or sleeving entities) originating from projects (eg energy efficiency for commercial clients, battery storage, gas peaking, social housing energy efficiency, solar PV).   It is important also to note that the FCA position is that token issues (including pre-sales and ICOs) of tokens which have a ‘utility value’ as opposed to being bought solely for speculative gain are permissible.    Thus they can be carried out by an authorised and regulated entity.   Note also that any UK entity originating such an issue without being authorised and regulated will be acting illegally.

The course will consider how energy tokens of any type can be traded (whether renewable or hydrocarbon).

Emissions tokens

Emissions tokens that can be traded on the platform can be of two types:

  1. ETS traded carbon credits. The role of ‘validating node’ probably being confined to (the relatively restricted circle of) the jurisdictional administrative authorities of the participating ETSs (eg EU, Chinese etc).   This pool of credits is already very large and liquid and is expanding as more countries launch ETSs as part of their policy implementation of their Paris Agreement NDCs.
  2. Voluntary offsets where the offsets are certified and traded by a recognised offset trading firm.

Whilst many people will understand energy trading, the trading of carbon perhaps requires a little more explanation.

The Coase Theorem introduced the concept of clear delimitation of rights to perform activities harmful to a third party and provided the basis for the market-based distribution of limited resources as a production factor and for a peer-to-peer settlement of reciprocal damage “to avoid more serious harm’’.

Reciprocal approach to the problem of social cost

Reciprocal approach to the problem of social cost

The manufacturers argue that they supply goods and services in demand, which at least means that the buyer of the goods and services (the second Party) is equally liable. From the economic point of view, it is actually the transaction, the deal between the two, which causes the damage.

Furthermore, the manufacturer can reimburse negative externality (collateral damage) against the claim of the third party in monetary form, or either of the parties or professional supplier of offsets (the forth Party) can provide for offsetting or mitigation ‘in-kind’.

Comprehensive peer-to-peer social cost problem solution

Comprehensive peer-to-peer social cost problem solution

Traditionally, such complicated interactions of the four parties are regulated by the governments, which take possession of the arbitration, assign taxes and fees, quantitative limits and commitments.

The advance of public and programmable blockchain technology, Turing complete systems, and triple-entry accounting allows for decentralized arbitration and truly peer-to-peer solutions, and thus allows for further development of the Coase paradigm.   It also importantly provides the economic basis for carbon trading.

Blockchain technology can be applied to mitigate the collateral socioeconomic damage caused by economic activities; it requires market-based infrastructure that supports decentralized peer-to-peer interactions, the public network evaluation of negative impacts, the distribution of liability, and settlement by means of mitigation outcomes.

Carbon or climate coins are typically open-sourced and provide for mitigation of collateral damage by means of offsetting by mitigation instruments and transparent accounting of mitigation activities.

They allow participants in greenhouse gas (GHG) credit-based or quota-based emissions trading schemes to account for claims made towards these targets.

The platform design objective is to provide any person, program, corporation, association or jurisdiction, with common space, common space fabric, common tools and ecosystem that is universal, reliable, transparent and that allows diverse stakeholders, including businesses and even individuals to:

  • register their quantified impacts and emissions reductions pledges
  • invest in mitigation projects
  • offset carbon footprints
  • acquire and trade mitigation instruments
  • join existing programs or launch new programs.

There are no technical restrictions as to who may launch an autonomous mitigation and the token which (in whole or in part) monetises it. Existing mandatory or voluntary, large and small programs of diverse scopes of activities and jurisdictions, as well as businesses, NGOs and individuals may create independent decentralized autonomous organizations (DAOs) to implement specific programs and projects and perform transactions. Independent mitigation programs on the platform may interlace and form a web of DAOs that share selected modules and protocols with their peers.   The only requirement is independent certification of abatement and rights to the credits arising from these renewable energy/energy efficiency/afforestation-avoided deforestation, EV etc projects.

Diverse mitigation instruments (environmental units) are represented by specific tokens issued via coordinated actions of each entity. Only if these actions are in coordination and in compliance with the logic of the open-source smart contracts may the tokens be traded on the platform.

Issuance of carbon or climate tokens representing mitigation instruments (environmental units)

Issuance of carbon or climate tokens representing mitigation instruments (environmental units)

Regular demand for tokens representing mitigation instruments is on the side of the participants of commercial deals that cause collateral damage, manufacturers, suppliers and consumers, sellers and buyers of goods and services. However, monetary claims for damages of a ‘the third Party’ is also a potential source of demand, which can be satisfied either in monetary form or by ’in-kind’ offsetting. Existing smart contracts in principal allow for initiating claim for damages, supporting it by secondary claimants, for either reimbursement or offsetting the damage.

3d Party Claim for Damages

I3d Party Claim for Damages

Tokens representing mitigation instruments type of token represents an internal currency for internal markets of independent programs, essentially a payment token, with a ‘utility value’, operators of independent programs, DAOs, may issue these type of token arbitrarily. This will be further considered on the Blockchain for the Renewable Energy Industry course.

Places on the upcoming Blockchain for the Renewable Energy Industry course are limited, so if you would like to attend please get in touch as soon as possible (part-funding is available).

Please visit: https://theECT.org/blockchain-for-renewables/ , call a member of the training team on (UK) 0131 623 1938 or email [email protected]