Diving into blockchain use cases: Wholesale energy trading
Blockchain technology is gaining momentum in the energy sector. In our latest State of the Market, we tried to give a first overview of this ecosystem – the innovators, corporates and investors making bets in the space. While this state of the market is already in need of an update, our assessment is that there is an even stronger need for understanding specific use cases and deployments. Which ones are actually getting piloted? Why use blockchain for this problem? How are innovators making money/creating value? In the past few months, we have been asked those questions countless times by investors and corporates alike. So instead of charting yet another sexy market map, we decided to explore a first use case we believe is commercially promising. We spoke to two blockchain innovators, Michael Merz of Ponton Enerchain, and Hugh Halford of BTL Group, who are both bringing blockchain solutions to wholesale energy trading.
We will attempt to answer the following questions:
- What is the wholesale energy trading process today?
- What are key pain points and inefficiencies in this process?
- How are BTL Group and Ponton tackling those? With what success?
Current process – and pain-points – of wholesale energy trading
For the purpose of this piece, we will consider a simplified version of the typical electricity or gas trading process:
Trader A initiates an energy trade with Trader B on an online exchange or by means of a broker, after consulting pricing intelligence through an index agency. After having closed the trade, traders A and B then separately enter the transaction details in their respective IT systems (known as ETRM systems). Both parties’ back offices then retrieve the transaction details from this ETRM system and exchange the data with each other, and/or the broker, in order to confirm and reconcile the trade. This step is achieved either by automated confirmation systems, like EFETnet in Europe, or through traditional communication channels (emails, calls, fax) and excel spreadsheets. The trade is then settled physically, through a transmission system operator (TSO) for electricity, or a pipeline or shipment for gas. It is also settled financially, through a clearinghouse or bank. Finally, both actors report the transaction details to the relevant auditors and regulators.
This complex process, using siloed IT systems and sometimes inefficient communications, generates a number of pain points and costs, which we would fold in two categories:
- High transaction costs (costly exchange and broker fees, pricing agencies, etc.)
- High operational costs (time-consuming reconciliation issues, costly back office processes, etc.)
Here is a summary of the energy trade lifecycle, pointing out the processes that the two innovators we interviewed are hoping to improve using blockchain:
BTL: Solving reconciliation issues
Founded in 2015, Blockchain Technology Limited (BTL) was previously active in financial services, partnering with Visa to improve cross border settlements, before entering the energy space. In wholesale energy trading, BTL identified trade confirmation and reconciliation issues as the first pain point that could be tackled using blockchain. In a partnership with Wien Energy, BP, Eni Trading & Shipping and other leading energy companies, BTL recently conducted a twelve-week pilot project specifically targeting reconciliation issues in the European gas market. We talked with Hugh Halford, Co-founder and CIO at BTL, to learn more.
As portrayed in the figure above, a portion of post-trade communications between trading offices are currently managed manually, meaning that counterparties verify and reconcile any discrepancies in their data by emails and fax. BTL proposes to change that by implementing shared ledgers between trading houses. Instead of sending trade details via email, the back-office logs a trade into a blockchain, which the counterpart can verify in real-time. With this system, traders do not store their data individually anymore, but share a secure medium in which information can be transparently actualized and validated. According to Hugh, this solution accelerates the workflow and reduces the potential for human error.
Privacy and scalability are other common concerns in wholesale energy trading. Hugh says this is one of the reasons why BTL has developed their own proprietary blockchain platform, Interbit, instead of relying on other existing blockchain engines such as Ethereum. The idea is to have one blockchain for every bilateral relation and have all those blockchains connect to one general directory blockchain. With other blockchain engines this would not necessarily have been possible, as Ethereum was not designed, according to Hugh, to natively connect to other blockchains.
Through this revenue-generating pilot, BTL aims to license the underlying Interbit infrastructure in the future and expand onto more downstream applications such as scheduling, invoicing, regulatory reporting and cash settlements, fitting the needs of individual clients. Eventually, BTL would not focus on the application layer, only on licensing the Interbit infrastructure.
Instead of going through the traditional VC route, BTL Group listed on the TSX Venture Exchange (TSXV: BTL) in November 2015, and recently raised over CAD 3 million through a private placement. With offices in Vancouver and London, BTL Group currently employs 26 people and is steadily growing. In its latest press release, BTL announced the successful completion of its pilot project, which will now be taking the steps into production phase.
Ponton Enerchain: Building an integrated trading system
Headquartered in Hamburg, Ponton is a software company providing solutions for B2B integration since 2000, focusing on standardization and automation of business processes in the wholesale energy and commodities market. The company has significant experience in automating trade confirmations in the European energy market, as the main software provider for the EFETnet confirmation platform. They are focusing their blockchain efforts on more upstream processes, starting with trade execution.
Piloting a project with 24 (and growing) energy-trading firms, such as Engie, Total and Enel, Ponton is building Enerchain, a blockchain-based software to allow for peer-to-peer energy trading in the European electricity market. We spoke to Michael Merz, Managing Director of Ponton, to learn about this pilot in more detail.
Ponton’s objective is to disintermediate the trading process by implementing Enerchain as a network in-between. In this system, traders are able to submit and execute trades directly, peer-to-peer, bypassing online exchanges operated by third parties. According to Michael, using a blockchain-based, decentralized platform to execute trade could bring significant cost reductions to trading operations, thanks to lower maintenance, servers and running costs once implemented.
Similarly to BTL, Ponton hopes to build on the Enerchain in the long-term to include other trading functions, once initial participants have gained sufficient exposure to the blockchain technology. One promising possibility, according to Michael Merz, could be the disintermediation of other market participants, such as index agencies. Those agencies, like Thomson-Reuters or Platts and Heren, gather market intelligence and provide traders with their pricing estimates and indices for a fee. If trades are executed on a blockchain, all trading data is concentrated and uniformly accessible by all participants, meaning that it would be conceivable to integrate an averaging function to exploit the recorded pricing data and make it available for all, for free.
The revenue-generating pilot (partners are charged a fee to join the consortium) builds on a prototype developed over the past year, and is intended to go live during the fourth quarter of 2017. If successful, it would be the first peer-to-peer trading system for the wholesale market using blockchain technology. To Michael’s own recognition, however, the pricing model behind the Enerchain trading platform is not yet clearly defined. At the moment, it is mainly a means for the consortium to get accustomed to the blockchain technology. For Ponton’s Enerchain team of 8, it’s a means to explore blockchain-based products to market in the future.
We will continue to bring you case studies on how blockchain technology is being deployed in energy and industrial settings. If you would like to hear more, or suggest a use case we should cover, don’t hesitate to reach out at firstname.lastname@example.org. We’d love to hear from you!
Note: This post is an abridged version of an article from our bi-monthly subscriber publication, CTG Insights. I would like to thank Jonathan Koch, a junior analyst at Cleantech Group, for his invaluable contribution to this research exercise.