June 5, 2017

Blockchain: Power to Renewables

"A match made in heaven", "Driver of the solar energy boom", "Entirely new energy models". These are some of the terms that have been used to describe the relationship between Blockchain and renewable energy1. But why is Blockchain so important in the renewable energy industry and what are the legal issues in the associated insurance sector? We take a look at three key areas of development to explore these issues.

First, what is Blockchain?

Blockchain is a public distribution database, or digital ledger. It is the software behind bitcoin but has a much wider application. Identical copies of data are stored on multiple computers around the world with no central hub or master copy, meaning it is decentralised. Any update to the information is made on every single copy, which is validated by cryptographic technology. This offers transparency and makes it extremely difficult to hack.

For further information about Blockchain generally and in a legal context, including a glossary of key terms, see Clyde & Co's Blockchain and the Law series at http://www.clydeco.com/insight/article/blockchain.
 

Three key areas of development

P2P

  • The effect on peer-to-peer trading is perhaps the most significant impact Blockchain will have on the renewable energy industry. It allows consumers to connect to and buy and sell energy without the need for third parties. This uses smart grids and virtual trading platforms to circumvent the traditional structures.
  • Most energy is currently transported through grids, from power plants directly to either private or business consumers. The transmission and distribution of energy over large distances however is very inefficient, with around 5% of energy on average being lost between the power plant and the consumer.
  • While it is not economically feasible for each home or business to become self-sufficient, with its own solar panels or wind turbine, Blockchain will facilitate the use of so-called "microgrids" whereby communities can produce and trade energy. For example, where one solar-powered household reduces energy consumption by turning off appliances when on holiday, the surplus energy produced can be sold to a neighbour. The system is altogether faster, simpler and more fluid, and gives prosumers (i.e. consumers who also produce energy) more control, leading to a more stable, less wasteful flow of energy.
  • The possibility of local microgrids could have a particularly significant effect on solar energy in developing regions which have plenty of sunlight but do not have the infrastructure of traditional grids. In addition, energy production facilities would not need to be installed at each prosumer's home. It will be possible to buy a solar panel for installation in the Sahara desert, for example, and for that energy to be used by a home or business anywhere in Africa. This form of energy transmission will be facilitated by the use of digital currencies, in particular "SolarCoin".

SolarCoin

  • SolarCoin is a form of digital currency, similar to bitcoin, and is specifically intended to incentivise the production of clean (in this case solar) energy. If a prosumer's sonar panel creates 1 MwH of energy for example, then he/she will receive 1 SolarCoin. This SolarCoin is then kept in an online wallet which can be used to receive payments for the energy sold, and to pay for energy purchased from neighbours.
  • Digital currency in this way becomes the energy meter, tracking consumption/production and balancing each household/business's books in terms of the energy that it requires.

O&M

  • Operation and management could also become more efficient through the use of Blockchain integrated with the Internet of Things (IOT). IOT is where objects are linked to the internet, or Blockchain, and, using smart contracts, automatically perform a function when certain, pre-coded criteria are met. The oft-used example is a refrigerator which uses a camera to monitor whether the milk needs replacing, and can place an online order when needed.
  • In O&M of renewables, this includes all aspects from monitoring consumers' usage via smart meters to understanding when assets need repairing or replacing without the need for rote inspections which can be timely, costly and unnecessary.

How will this affect the Insurance Sector?

  • The combination of Blockchain and the lowering costs of technology has led to a recent boom in solar energy in particular, which could present new and interesting insurance opportunities especially in developing regions. As P2P trading of energy becomes more commonplace, we can expect to see an increase in renewables construction projects, which in turn should create the need for more underwriting across this line of business.
  • Although prosumers will limit the need for intermediaries, a certain amount of infrastructure will still be required and this will need to be owned and maintained by a responsible party. The contractual arrangement between the buying and selling prosumers will need to be agreed: who carries the liability if energy production is restricted due to weather conditions and a business cannot operate, or needs to rely on other, more expensive forms of energy?
  • Smart grids and smart contracts could also be used to feed into parametric renewable energy insurance solutions i.e. where a policy automatically pays out on the occurrence of an event that can be verified using updated, real-time, objective weather data measured against pre-coded criteria. Is it noted that this might apply more effectively to, for example, a natural catastrophe event, rather than to the adjustment of complicated property damage and BI claims in the renewable energy sector where causation may be difficult to determine.
  • In summary, there is clear evidence that Blockchain and in particular the P2P trading platforms, could transform renewable energy, and that it has already started to do so across the world. This has clear implications for the insurance industry which will need to be carefully managed. These developments will require legal and regulatory monitoring, particularly where cross-jurisdictional and decentralised technologies are involved.

1https://thenextweb.com/contributors/blockchain-and-renewable-energy-a-match-made-in-heaven/#.tnw_Mow1OGtg
https://news.bitcoin.com/bitcoin-blockchain-solar-energy-boom/
http://fortune.com/2016/05/15/blockchain-reinvents-power-grid/