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Blockchain: A New Tool to Accelerate the Global Energy Transformation

MD Staff

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Few technological innovations have captured the public interest in recent years as much as blockchain. Most of the attention has focused on the meteoric rise of the cryptocurrency Bitcoin, part of a total cryptocurrency market that, at its peak in January, rose to over USD 800 billion and then almost as rapidly fell to a quarter of its size.

But cryptocurrencies are only one application of blockchain (which is in itself an example of distributed ledger technology), and for many, the Bitcoin hype is merely a distraction from the transformative potential that blockchain technology could offer to a wide range of industries, including energy.

Blockchain was one of the big topics of conversation in September 2018 at IRENA Innovation Week, where more than 400 corporate leaders, government officials and experts at the forefront of energy gathered to discuss the innovations driving the energy transformation forward.

A blockchain is, in a basic sense, a secure, continuously growing list of records. It is constructed as a decentralised database that is distributed and managed by peers, rather than by a central server or authority. This technology is enabling a new world of decentralised communication and coordination, by building the infrastructure to allow peers to safely and quickly connect with each other without a centralised intermediary. Cryptography ensures security and data integrity, while privacy remains intact.

Greater complexity requires greater network intelligence, transparency and visibility

To understand the disruptive potential of blockchain to the energy sector, consider how electricity is generated. By and large, most countries rely on large, centralised power plants that generate electricity and then send it across long distances over power grids that were built as a one-way street, sending electricity from the producer to your home. Moreover, the markets in which grids operate are complex multi-party interactions involving grid operators, energy companies, and energy producers that run on a country-wide level.

Today, grids have become increasingly complex, with increasing shares of variable distributed generation (such as rooftop solar), increasing numbers of internet-connected devices (such as smart appliances), and increased loads from the influx of electric vehicles. Blockchain can help operate power grids with high penetration of variable distributed generation and flexible demand-side resources in a more efficient, automated way, all with lower transaction costs.

Blockchain can allow system operators of distributed generation to optimise grid operation by managing all connected devices through automated smart contracts, enabling flexibility and real-time pricing. Blockchain also empowers consumers to become ‘prosumers’ by enabling them to monetise their excess electricity (generated by rooftop solar for example) by securely recording data and sending and receiving payments automatically, through smart contracts built on platforms such as Ethereum.

Increased digitalization and interconnection have led to increased risks with regards to security. Blockchain, due to its distributed nature, can greatly increase the security of a network if implemented correctly. In coordination with burgeoning technologies such as AI, blockchain can play an important role is securing networks and grids.

An explosion of startups, but a long road ahead

Since the start of 2017 alone, more than fifty new startups launched that are working specifically on energy, raising more than USD$320 million. Today, there are more than 70 demonstration projects deployed or planned around the world, such as LO3’s Brooklyn Microgrid project, where customers can choose to power their homes from a range of renewable energy sources, and people with their own solar panels can sell surplus electricity to their neighbors. Another, from German power giant RWE, is using the Ethereum blockchain to authenticate users and manage billing at electric car charging stations.

But there’s still a way to go before blockchain is mature enough to play a major role in the energy sector. One major hurdle is the fact that the energy sector is highly regulated and widespread adoption of blockchain will require a clear, stable regulatory framework.  While there are early signs of progress, such as Ofgem’s roundtable on UK blockchain regulation in September of last year, Singapore’s launch of a sandbox for energy innovations, and new legislation in US states like Vermont to help apply blockchain technology, the regulatory environment still needs to be defined.

Another is a more fundamental question around the consensus mechanism that blockchains use. Because blockchains are decentralised, they need some way to make collective decisions that are quick, secure, and trustworthy. Right now, there are a number of different ways to do this, including ‘proof of work’, which relies on increasingly computationally expensive (and energy-intense) puzzle solving, and ‘proof of stake’, which relies on those with the largest stake in the network to add the next block of transactions to the blockchain, and ‘proof of authority’, which relies on the identity of validators to function as their stake, among others.  As yet, all of these mechanisms continue to be developed and none has been fully proven to be 100% reliable, secure, scalable and energy efficient, yet the potential risks—ranging from billion-dollar hacking losses to power-sucking coal-powered bitcoin mines—are huge.

However, new consensus protocols are being developed and tested all the time.  As the technology matures, software platforms built on blockchain will be an increasingly attractive method to handle the increasingly complex and decentralised transactions between energy users, producers of various sizes, traders and utilities, and retailers.  Furthermore, blockchain’s ability to autonomously reconcile supply and demand between meters and computers based on smart contracts is a revolutionary efficiency improvement.

This makes it well-suited to support an energy system of the future that is renewables-based, decentralised and distributed, digital, and democratic. The real relevance and impact of blockchain in the energy sector remains to be seen. How the technology and its application matures in coming years is going to be an exciting part of the story of the global energy transformation.

IRENA

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A review on govt. plan to barter oil for dues to private sector

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The regulatory body of the government has been recently preparing the draft for a bartering system which is set to settle the government dues to the private power plant owners and electricity contractors.

Based on this draft, nearly 400 trillion rials (about $9.52 billion) worth of oil is going to be given to the private companies in return for the electricity that they have provided for the national network, or for the services that the contractors provided for the energy ministry.

According to the energy ministry, big companies and well-established contractors have given green light to such a mechanism in order to settle their dues.

Although this mechanism has been mentioned and foreseen in the budget law, and the government’s efforts for paying its dues to the private sector, in itself, is a positive act which must be appreciated, but there is still uncertainty about the practicality of this approach. 

Is this method really suitable for solving the financial problems that the government is facing regarding the private sector and the electricity industry? And if yes, what would the scale of such bartering system be? Would it cover small amounts as well?

Govt. payment mechanisms

So far, the Iranian government have tried numerous approaches and mechanisms for settling its debts to the private sector, in times that the financial conditions are not right for clearing payments with money (like during sanctions and recession).

Bartering the dues for “treasury bills” was one of the first approaches that the government used in order to pay its dues to the electricity contractors and private power plant owners. In this method, the energy ministry would pay it dues in the form of a treasury bill which can be traded for raw materials like aluminum ingots, steel and etc. needed by the companies and contractors.

Another mechanism was using “clearing bills”, in this method the government would offset its debts to the companies and contactors with the taxes and legal bills which they were supposed to pay to the government in order to operate.

Many experts and analysts believe that such approaches are suffering from significant shortcomings and loopholes. For instance, in many cases, the value of the government’s treasury bills could decrease drastically at the time that the company or contractor wants to use them, or the manufacturers and companies doesn’t supply the items covered in the bills, so many of the owners of such bills will be forced to sell them to middlemen in the market for lower prices in order to use the money with more flexibility.

The new approach

Analysts and experts in the country’s power industry believe that, like many other methods which have been implemented so far, the oil-for-due mechanism has its own shortcomings and drawbacks.

They argue that this mechanism only good for big companies and contractors with large amounts of due payments, and the small and medium-sized companies and enterprises would not benefit much from such bartering system.

The ministry of energy has said that this method is intended to settle state debts to large contractors. This means that the government itself believes that the developed method works only for large contractors or large companies. But, it should be noted that the number of big contractors which have the means to receive, transport and sell oil in or outside the country is not that much and many of the companies, active in the energy industry are small and medium-sized companies.

This suggests that the target population which the government has considered for this mechanism is not that rational and the statistical pool considered for this method is very limited and small.

It is also said that since this new mechanism requires the coordination between two different miniseries, namely energy ministry and the oil ministry, inevitability some unforeseen issues might emerge in the process.

Final thoughts

Many of the experts and scholars in the country’s energy industry believe that if the energy ministry wants to take measures to address its debts to the private sector, it should find a comprehensive and inclusive solution, one that covers the whole industry, since as I mentioned before only a limited number of companies in the country have the ability or means to use oil as a payment method.

The best way to address the financial issues which the energy ministry is facing is to remove the subsidies which is applied for the electricity bills for households and commercial consumers.

There is a huge gap between the real value of electricity and the price with which it is provided to the consumers in Iran. Closing this gap (only if partially) would solve many of the financial problems that this industry is currently facing.

Emending the power industry’s economy requires emendation in the country’s economic structure at a macro level, but unfortunately there doesn’t seem to be any will for going in that direction anytime soon.

From our partner Tehran Times

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Iran’s ‘oil for execution’ plan: Old ideas in a new wrapping

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This week Iranian Oil Ministry is going to officially start a new plan that is aimed to be a new way for selling oil and tackling the pressures imposed by U.S. sanctions on the country’s oil industry.

The plan is to execute a barter system which allows domestic and foreign companies, investors and contractors to carry out projects in Iran in exchange for oil (I would like to call it “oil for execution”).

In this regard, as the official inauguration of this new program, a business contract will be signed within the next few days, under which a domestic company is going to receive crude oil in exchange for funding a project to renovate a power plant in Rey county, near the capital Tehran.

At the first glance, the idea of offering oil in exchange for execution of industrial projects seems quite a new idea, however unfortunately it is no more than the same old structure under a new façade.

U.S. sanctions and Iran’s coping tactics

Since the U.S.’s withdrew from Iran’s nuclear pact in May 2018, vowing to drive Iran’s oil exports down to zero, the Islamic Republic has been taking various measures to counter U.S. actions and to keep its oil exports levels as high as possible.

The country has repeatedly announced that it is mobilizing all its resources to sell its oil, and it has done so to some extent. However, considering the U.S.’s harsher stand in the new round of sanctions, the situation seems more complicated for the Iranian government which is finding it harder to get its oil into the market like the previous rounds of sanctions.

Selling in the gray market, offering oil in stock exchange, offering oil futures for certain countries, bartering oil for basic goods and finally bartering oil in exchange for executing industrial projects are some of the approaches Iran has taken to maintain its oil exports.

A simple comparison between the above mentioned strategies would reveal that they are mostly the same in nature, and there are just small differences in their presentation and implementation.

For instance, let’s take a look at the “offering oil in stock market” strategy, and to see how it is different from the new idea of “offering oil in exchange for development projects”.

Oil at IRENEX vs. oil for execution 

As I mentioned earlier, one of the main strategies that Iran followed in order to help its oil exports afloat has been trying new ways to diversify the mechanisms of oil sales, one of which was offering oil at the country’s energy stock market (known as IRENEX).

In simple words, the idea behind this strategy was that companies would buy the oil which is offered at IRENEX and then they would export it to destination markets using whatever means necessary.

Since the first offering of crude oil at Iran Energy Exchange (IRENEX) in October 2018, the plan has not been very successful in attracting traders, and during its total 15 rounds of oil (including heavy and light crude) offerings only 1.1 million barrels were sold, while seven offerings of gas condensate have also been concluded with no sales. This has made some energy experts to believe that this whole strategy is doomed to fail.

The most important challenge that Iran has been faced in executing this approach is the impact of U.S. sanctions on the country’s banking system and its shipping lines, since the purchased oil, ultimately has to be transported from the agreed oil terminals via oil tankers to different destination across the world. 

With the previous strategies coming short, nearly six months after the first offering of oil at IRENEX, in early May, Masoud Karbasian, the head of National Iranian Oil Company (NIOC) announced that the company plans to barter oil for goods and in exchange for executing development projects.

However, the “oil for execution” part wasn’t implemented until this weekend when Head of Thermal Power Plants Holding Company (TPPH) of Iran, Mohsen Tarztalab announced that the company is going to sign a €500 million contract under the new “oil for execution” framework for renovation of Rey power plant near Tehran.

According to Tarztalab, the TPPH decided to go for the deal after the sanctions prevented Japan from financing the renovation of Rey power plan.

Based on this deal, TPPH is going to renovate the power plant and in return NIOC will pay for the services in the form of crude oil. Clearly, TPPH is then in charge of the received oil and it’s their concern weather to export it or sell it inside the country.

A closer look at this deal, reveals how similar it is to other approaches that NIOC has been taking. Just like the oil offered at IRENEX, in this model, too, a company is left with an oil cargo which is banned from entering global markets. The buyers are once again facing financial barriers and shipping difficulties.

Although, like the first oil offering in which a few companies risked buying some oil, this time, too, TPPH, is making a significant gamble in signing this deal, but, just like the IRENEX experience, it seems really improbable for more companies to follow the state-owned TPPH’s footsteps.

Final thoughts

The need for taking all necessary measures for withstanding the economic pressures of the U.S. sanctions is an obvious fact, however the ways of doing so should be chosen more carefully.

It seems that the government has been only wrestling with the “problem” here rather than attempting to find practical “solutions”.

Fortunately, in the past few months, the government seems to have seen the fact that the best way to withstand any economic pressure is the transition from an oil-dependent economy to an active, self-sufficient and independent economy which is more invested in its potentials for trade with neighbors rather than the oil market. 

Solutions like offering oil in the energy exchange or oil for execution might be some kind of transition from traditional oil sales to new approaches, but they are not ultimate solutions in the face of sanctions.

To overcome the current economic conditions, the government has realized that it should have medium- and long-term planning and policy making. 

Active diplomacy and attention to the energy needs and capacities of the neighboring countries and offering discounts for oil products, although are more time-consuming ways to increase oil sales, but will be more successful than the ways we discussed, and will yield greater benefits for the country.

From our partner Tehran Times

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The who and how of power system flexibility

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All around the world, power systems are changing fast. For example last year Denmark supplied 63% of its power demand from variable renewables (wind and solar PV) while last June Great Britain went a full 18 days without burning coal for power generation.

Yet despite such examples of progress, change has not been fast enough to meet the objectives of the Paris Agreement. In fact, power sector emissions have been on the rise over the past two years and investments in variable renewable power capacity appear to have stalled for the first time in two decades. Meanwhile electrification continues in sectors such as transport – and without accelerated decarbonisation, much of the growth in power demand will be met by fossil fuels.

But having more low-carbon electricity on the grid is not enough; we need to make better use of that low-carbon electricity. That means coordinated action on the transformation of power systems.

Power system flexibility – the ability to respond in a timely manner to variations in electricity supply and demand – stands at the core of this transformation. Luckily, policy makers and industry leaders across the globe are increasingly aware of the importance of flexibility and are taking action. Over the last two years, two Clean Energy Ministerial Campaigns have contributed to developing an understanding of what technical solutions for flexibility are available – in power plants, grids, storage and on the demand side.

That’s the ‘what’ of power system flexibility. But the more difficult questions are ‘how do we implement this flexibility?’ and ‘who should be involved?’.

The answer is: it depends. More precisely, introducing the appropriate measures to deploy power system flexibility requires a deep, thoughtful look at each country’s institutional framework. One key finding from the various workshops and forums organised by the CEM Power System Flexibility Campaign is that the changes necessary to activate innovative flexibility solutions inevitably deal with regulatory decisions.

One key myth that these same events are contributing to dismantle is that power sector regulation is far too complex and far too country-specific to profit from international sharing of best practices. In fact, it may be the contrary. This sharing of best practices is one of the main contributions of the joint IEA and 21st Century Power Partnership report Status of Power System Transformation 2019, which explores the various points of intervention, along with the relevant stakeholders for flexibility deployment.

The report describes how it is possible for policy makers to easily identify areas where they can directly enable change and areas where more targeted interventions may need wider stakeholder engagement.

It starts by looking at energy strategies, legal frameworks, and policies and programmes. These high-level instruments are usually what is thought of when looking at renewable energy policy support. While relatively far away from implementation, this level is particularly important as it sets the overall course for power system development.

Energy strategies typically lay out broad targets, such as China’s target of flexibility retrofits for 220 GW of coal-fired power plants in its 13th Five-Year Plan or Switzerland’s ‘Energy Strategy 2050’. Legal frameworks go one step closer to implementation by defining electricity industry structure along with the foundations of who does what, such as the UK’s recent bill for electric mobility or the distribution sector and flexibility reforms in Chile. Lastly, policies and programmes can be useful tools to test specific technology approaches or focus on specific aspects of the energy transition, for example Italy’s feasibility study on ‘Virtual Storage Systems’ or the creation of a working group for the modernisation of Brazil’s power sector.

While these high-level solutions are necessary and can be very effective, accelerating the energy transition for increasingly complex and decentralised power systems will increasingly require detailed fine-tuning of institutional frameworks. This is where we come to regulation, market rules and technical standards. By allocating costs and risk, regulation essentially determines who can do what, and how. Similarly, market rules and technical standards play a key role in shaping the interactions of different stakeholders in the power system.

In many cases, it may be necessary to update regulatory frameworks to recognise the new capabilities of new technologies in the power system. This might be the responsibility of the regulator in the case of vertically integrated utilities or spread across regulatory decisions, market rules and technical standards in the case of more unbundled power systems.

For example, if modern wind and solar power plants are technically able to provide frequency regulation, the recognition of their contribution to system reliability may require a regulatory decision to assess and validate their capabilities. It might also require modifying the system operator’s market rules to allow access to ancillary services, as was done in Spain.

Similarly, if digitalisation and decentralisation of the power system offer the potential of greater demand-side participation, it will be regulation that enables smaller system resources to participate in energy, capacity and ancillary service markets. How this is implemented would vary across jurisdictions, for example updating prequalification requirements may be necessary to enable aggregation, as in the EU, simply recognising independent aggregators as market players, as in Australia, or reforming retail tariffs as in Singapore.

But to know what changes should be implemented, and by who, it is critically important to understand the specific point of intervention and engage the right stakeholders. More broadly, it is important to start a conversation with a comprehensive set of stakeholders, to get an idea of what is possible and what is needed, and to compare experiences within and across countries.

Over the coming year, the IEA and PSF Campaign will continue working on this global dialogue to improve the understanding of regulatory and market design options for the deployment of system flexibility, supported by the Campaign’s co-leads – China, Denmark, Germany and Sweden. The PSF campaign is preparing initial steps to collaborate with CEM’s 21st Century Power Partnership, the Electric Vehicle Initiative and the International Smart Grid Action Network to look at the linkage between power system flexibility and transport electrification, an important conversation given the trend towards decentralisation driven by adoption of electric vehicles.

This work all aims to drive home one key-message: we need creative policy making if we are serious about accelerating the energy transition, and regulatory innovation and international cooperation are a good place to start.

IEA

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