How smart contracts will change the energy market

smart contracts, G20

By Giovanni Polizzi, Energy Solutions Manager at Indra Australia

Contracts are an essential part of the operation of the energy value chain.

Retailers hold contracts with distributors to get access to power. Likewise, end users hold contracts with retailers for power to be delivered into their homes or businesses.

Contracts set out the terms and conditions, responsibilities and commitments made by all those party to the agreement.

Not much has changed with contracts over a long period of time. They remain complex legal documents, and working out whether or not agreed conditions are met remains challenging and time-consuming.

But this is starting to change. Over the past year in particular, large numbers of trials of so-called ‘smart contracts’ have started to appear.

In some ways, the trials reflect a trend to make a lot of aspects of life smarter – smart cities, smart infrastructure, smartphones. Adding smarts to more analogue ways of working is arguably a logical evolution.

But the rise of smart contracts will create fundamental shifts in energy markets in Australia.

Smart contracts will introduce new levels of accountability to energy transactions.

They will ensure that terms built into contracts are met, and then record that in a distributed repository known as a ledger. They will do this by pulling in trusted sources of data – including from internet of things (IoT) sensors – to electronically check that the contract has been executed properly.

Smart contracts are also smart enough to include different level of access to data for contractual terms, for billing and for more generic statistical and market analysis. Thus, a single smart contract can meet the needs of multiple parties in a single energy supply value chain.

Arguably, smart contracts could also usher in a new way for Australian market participants to meet their obligations for simpler data exchange under the government’s ‘Power of Choice’ program.

Several industry players have raised the prospect of exploring the potential of distributed ledger or blockchain technology to underpin ‘Power of Choice’ and address deficiencies in that project, and it is largely in the government’s hands as to whether it will agree to trials.

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Burgeoning trials

What could encourage the government’s hand to do so, however, is the large number of successful trials and projects cropping up in adjacent markets.

Last August, law firm Herbert Smith Freehills joined CSIRO’s Data61 and IBM to create what they are calling ‘smart legal contracts’.

They are planning to insert ‘smart clauses’ into contracts that will be able to ‘self-execute if specified contract conditions are met’. Importantly, the contract will ‘know’ this because it will be monitoring electronic data sources such as internet of things (IoT) sensors.

For example, construction site sensors could record the time and date of a delivery of a load on the blockchain and trigger a smart contract between the construction company and the bank that would automatically notify the bank that terms have been met to provide payment on that load delivery.

A wide variety of banks are also entering similar types of trials.

The Commonwealth Bank recently trialled a similar mix of ‘distributed ledger technology, smart contracts and the IoT’ sensing to track a 17-tonne shipment of almonds from a farm in Victoria to a port in Germany. Again, smart contracts were used to guarantee that conditions of the sale and shipment were met.

In Spain, financial institution BBVA and technology firm Indra closed a €75 million loan this year with similar smart contract technology.

“The current process of contracting corporate loans is long and complex with various interactions between the bank and client, with numerous time-intensive iterations and reviews needed,” Indra said.

“This pilot addressed the complete process from negotiation up to the signing of the loan.”

These trials and pilots demonstrate that potential is being recognised in the combination of smart contracts, IoT and blockchain. There is nothing to be lost – and much to potentially be gained – from the Australian government backing a similar trial for the energy sector.

Likewise, there is plenty of scope for industry participants to conduct their own trials.

An energy service provider could, for instance, measure the quality of the power supply and create smart contracts that would directly execute claims for reimbursement to distributor in case of a power outage and when the supply does not comply with the agreed service levels.  The distributor would then issue the corresponding compensation according to the conditions of the smart contract.

Automation of that process could dramatically decrease the costs of compliance and also be run in real-time.

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A path forward for Australia

A major opportunity at present in the Australian market is to improve information exchange between energy market participants. Ostensibly, the government’s Power of Choice program should have achieved this already, but significant problems of information exchange among the participants in the value chain remain.

The workflow in practice is quite prone to errors and delays and can take several days to weeks, not to mention the costs in overheads. Additionally, numerous cases have been registered where customers were illegitimately assigned to a new retailer (either by mistake or by misconduct of marketers) and have had significant problems to restore their previous contract, not to mention the supply of energy.

All of this could be resolved with smart contracts and blockchain (and potentially augmented with IoT data).

Customers would sign up a smart contract with their chosen retailer and grant access to the meter to the metering agent proposed by the retailer. The metering agent would be in charge only of reading the meter and uploading the data to the blockchain by securing the access only to itself and to the customer.  Other third parties would stipulate smart contracts directly with the customer to receive a limited and temporary access to the metering data.

Changing retailer would be extremely simplified as it would only require the conclusion of the existing smart contract and the initiation of one with the new retailer.

The regulator could instruct retailers and metering agents to migrate all customers’ data to the blockchain and to create specific smart contracts to carry out business-to-business (B2B) transactions. Any technical issues regarding the B2B smart contracts could be addressed during this initial phase, until any switching can be performed entirely through the platform.

Retailers would still be responsible for the customers’ data and customers would have the option to continue their relation with the retailers out of the blockchain platform.

In subsequent phases, customers could start to use the blockchain platform through the establishment of smart contracts with the retailers to pay the bills, and with metering agents, energy service providers and distribution networks to grant access to data. Customers would then be fully responsible for their data and the privacy of it, without having to rely on any third party.