BLOCKCHAIN AND SMART CONTRACTS IN THE ENERGY INDUSTRY: A EUROPEAN PERSPECTIVE
| Jurisdiction | Derecho Internacional |
BLOCKCHAIN AND SMART CONTRACTS IN THE ENERGY INDUSTRY: A EUROPEAN PERSPECTIVE
Bird & Bird
Düsseldorf, Germany *
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MATTHIAS LANG is a partner at Bird & Bird in Düsseldorf, Germany. He is on the steering committee of the firm's International Energy & Utilities Sector Group. Matthias heads the firm's infrastructure group and also co-heads the Energy Digitalisation Group. He regularly advises clients on energy, regulatory, and environmental law as well as issues arising from public commercial law. Matthias has additional expertise in corporate law, administrative, European law, as well as standardisation. Matthias has extensive experience in advising clients on all aspects of the German Energiewende (energy turnaround) and cross-border energy issues. He has worked on numerous complex infrastructure projects as well as transactions in regulated industries. Matthias is a regular contributor to conventional and online legal publications. He writes the section on permits for conventional power plants, wind farms, solar parks and the closure of nuclear power stations for the "Berlin Commentary on Energy Law". He covers international company law in the "Beck Online Commentary on the Limited Liability Company Act". He has recently also published articles on oil and gas law in Germany, prosumer legislation, the digitalisation of the energy transition, state aid to the coal sector, grid expansion and environmental protection in the extra high voltage grid, on the permitting regime for HVDC lines and the Renewable Energy Sources Act (EEG). Matthias is on the Council of the International Bar Association's Section on Energy, Environment, Natural Resources and Infrastructure and the past chair of its Oil and Gas Law Committee. He teaches post graduate energy and environmental law courses at Technische Universität Berlin and Freie Universität Berlin. He is listed as top energy law practitioner in various directories, including Euromoney's 2018 Energy and Best of the Best Expert Guides, the 2018 Who's Who Legal Energy and the Who's Who Legal Germany 2019.
1. Introduction
Even for an energy lawyer - in Europe or elsewhere - blockchain technology is hard to ignore these days. It is clearly one of those potentially very disruptive technologies that raise high expectations across both renewable and fossil energy industries.
Some dream that blockchain, in combination with smart contracts, can be an answer to some if not all the most pressing questions of the energy transition. This may in particular include ensuring security of supply in the light of highly volatile renewable electricity sources. The most radical scenarios anticipate that blockchain will do nothing less than reshape the energy industry entirely and turn electricity markets as we know them into decentralized structures, where utility providers are superfluous and electricity is traded directly among peers. In the oil and gas sector, blockchain can possibly lead to significant cost and time savings for example in commodity trading.
Of course this raises questions as to the technical feasibility of such visions. For a lawyer, a key question is how blockchain applications fit into the relevant legal frameworks.
This article will discuss to what extent blockchain and smart contracts in the energy sector are compatible with the law of the European Union (EU). To this end, a brief introduction will provide the technical basics of blockchain, smart contracts and Ethereum, a platform for blockchain applications, before examples of use in the energy industry will be outlined. The legal issues of blockchain and smart contracts arising under EU law will then be analyzed, focusing on EU energy law, contract law, consumer protection law, data protection law and financial markets regulation.
We will argue that the EU's legal framework, whilst accommodating for some blockchain applications already, still provides obstacles for the implementation of true peer-to-peer electricity trading between consumers. But obstacles can be overcome - if dealt with properly.
2. Blockchain, Smart Contracts and Ethereum in a Nutshell
Blockchain is frequently associated, if not equated, with Bitcoin. Indeed, the digital currency envisaged by Satoshi Nakamoto is the first application of the blockchain technology,1 but it is by far not the only one.
Blockchain is conceptually a distributed, decentralized ledger that enables direct peer-to-peer electronic transfers of value without the need for an intermediary.2 Put simply, blockchain is a form of record-keeping,3 a digital database, but unlike traditional databases, the information
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it contains is not stored centrally. Rather, participants of the blockchain, "nodes", store identical copies of the database, making a central authority controlling the data superfluous.
Each user of the blockchain has an account which it can access by using a private key, similar to a password, and each account has a (pseudonymized) public key to identify it to other users. Every time a transaction is made, such as the transfer of a certain amount of a digital currency from one user to another, a new block is created and verified by "miners" in accordance with a consensus protocol. The block is then added to the already existing blocks and broadcasted to the other nodes, who will then append it to their local copies - hence the name blockchain.4
"Proof-of-Work", the consensus protocol used by Bitcoin5 and other cryptocurrencies, ensures that mining does not come without cost, in order to safeguard the blockchain from malicious actors.6 To create a new block, miners have to solve a mathematical problem, a "hash puzzle". The miner who solves the problem first creates the new block and receives bitcoin as a reward, thus incentivizing miners to invest significant resources in order to provide the computing power to solve the problem, which, in turn, demonstrates their integrity.7
The downside is, however, that Proof-of-Work consumes - and wastes - high amounts of energy, as all miners invest computing power to solve the puzzle, but only one of them will succeed by creating a new block.8 Exact figures on power consumption from cryptocurrencies are difficult to come by. For bitcoin alone, estimates were in the range of 2.55 GW in mid 2018, which would translate into 22 TWh annually, or about the consumption of Ireland.9 But maybe this contributes to blockchain's appeal to the energy industry.
The idea underlying blockchain is, in essence, to remove the necessity of trust from value transactions between people who do not know each other.10 In a blockchain based system, they do not need to trust each other, as the technology is "tamper-evident" and records transactions in an irreversible way. This is because each block is marked with a timestamp and a hash that is also reflected in the next block, keeping the blocks in the right order und linking them in an immutable sequence which makes it, at least in theory, impossible to modify an existing transaction. Tampering with the information contained in a block would become apparent immediately.11 A decentralized system, blockchain further removes the need to rely on trusted third parties, such as financial institutions, and hopes are high that this will decrease transaction costs.12
These essential features are shared by Bitcoin and other public or permissionless blockchains, allowing anyone to become a user, node or miner. By contrast, private or permissioned blockchains are not open to everyone and differ significantly from the blockchain originally envisaged by Nakamoto. Broadly speaking, they come in the form of either consortium blockchains, where only a number of pre-selected, trusted nodes control the consensus process; or fully private blockchains, where write permissions are in the hand of one,
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centralized organization.13 This reduces the need for resource-intensive mining, making the blockchain cheaper and faster to operate.14
Coupled with smart contracts, blockchain may have the potential to revolutionize not only the financial sector, but the energy sector as well. The concept of smart contracts, first described by Nick Szabo long before the emergence of blockchain technology, denotes "a set of promises, specified in digital form, including protocols within which the parties perform on these promises".15 In their simplest form, for instance, they are used to transfer assets to a buyer once payment is made -- comparable to a vending machine.16 When combined with blockchain, the rules set out in smart contracts must be fulfilled for a change of state to be triggered within the blockchain.17 This is the idea behind Ethereum, a platform that provides a blockchain with an integrated "Turing-complete" programming language, meaning that it is suitable for any smart contract or transaction that can be defined mathematically.18 Ethereum and similar platforms thus allow running smart contracts far more complex than the vending machine prototype.
3. Applications of Blockchain and Smart Contracts in the energy industry
Often referred to as the "internet of value", the blockchain was invented to send value, usually expressed in a digital currency, anywhere in the world.19 Energy, on the other hand, is physical. As a technology that moves and stores data, blockchain itself cannot generate, store, transport and deliver energy, or replace electrical grids.20
Still, energy digitalization opens up a vast range of possible applications for both blockchain technology and smart contracts. They can be as simple as a vending machine and involve smart meters that only release energy to residential consumers once they transferred money to the electricity supplier, an idea developed by the South African start-up Bankymoon.21 The technology is further able to track the provenance...
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