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SH: Hello, and welcome to this Brussels to Beijing policy podcast from S&P Global Platts. I’m Siobhan Hall, Platts’s expert on European Union energy policy based in Brussels, and I’m joined from London by Power in Europe editor Henry Edwardes-Evans, and our global innovation director James Rilett.
Today we’re talking about a disruptive technology – blockchain – which could bring large-scale automation to commodity markets in just a few years’ time. The technology itself is relatively simple. Getting the regulation right, however, is likely to prove much more complex.
So Henry, you’ve been following blockchain closely for Power in Europe. What’s the latest?
HEE: Well, Siobhan, the latest is that big utilities are working together to build Europe’s first ever gas and power trading platform using blockchain. We’re talking big names here – E.ON, Enel, Engie and so on – and the plan is to start live trading on it before the end of this year.
SH: Wow, that seems pretty quick. What kind of products are they planning to trade?
HEE: Pretty much anything that can be physically delivered, so forward and spot for both gas and power. There are around 20 utilities from across Europe already involved, and the platform developer, Ponton, is in talks with more.
SH: It sounds like they’ve got most of the European gas and power market involved, already. James, you look across commodities. Have you seen similar developments in other markets?
JR: Well, Siobhan, it’s really interesting to hear about the cooperation between gas and power companies, because in the oil market, for example, it’s not always easy to get participants together around the table. In fact, we’re hearing that recent plans for a meeting amongst crude oil traders couldn’t go ahead because of inhouse counsel and maybe even regulatory concern over antitrust connected with that.
SH: OK, so there’s always this issue about wanting companies to be competitive whilst they cooperate, and you know that’s a difficult issue for regulators, so regulation is still a big issue then?
JR: Yes, it’s a big issue, and it’s not just antitrust. I mean, blockchain creates a fully decentralized environment for trading – there’s no central authority or permissioning system, everyone has a copy of their own distributed part of the ledger, and that’s encrypted. And how do you regulate a decentralized environment? This is completely new territory for regulators.
HEE: Yes, and James, obviously it’s new territory for the rest of the market too. And we’re seeing Eurelectric, the European electricity association, just launching a one-year project to look at what blockchain could bring to emobility in electricity, flexibility and trading. There are a number of areas they’re going to look at.
SH: And what does Eurelectric plan to do with the results?
HEE: Well, it’s very early stages, Siobhan, but my understanding is that Eurelectric’s approach will be its normal one which is to help policy makers and regulators understand what looks like a pretty complex technical area. Blockchain is seen as a “wild west” area for trading still. It’s in early stages, not mainstream yet. But every single company that I’ve come across is looking at use cases for this technology, whether that’s in generation, networks, trading or retail.
JR: That’s interesting and encouraging to hear, Henry, and I can see why they’re taking that role. But I just wonder – I mean a one-year study might be to be too slow to be useful. The technology is changing every few months, it’s being developed in real time. It’s going to be really difficult for policy-makers to keep up.
SH: Well, I can see why you’d say that, but it looks like the European Commission is going to try. So, it’s planning to spend about half a million euros over the next two years on an EU blockchain observatory. Now, the idea is that this observatory will keep the commission updated on all blockchain developments around the world. And that would include legal and regulatory issues, for example.
JR: That’s interesting too. I mean, on regulatory issues, Europe could well have an advantage. I’ve just got back from Washington DC. If you look at Europe versus the US and Asia, we have a much more consolidated regulatory environment, so there’s a better chance of a consistent regional approach, which could work in favor of those trying to adopt the technology.
HEE: Yes, and a regional approach lends itself well to creating regional markets, which then actually need to be reduced right down to microgrids and distributed networks at local level, because blockchain really does support those disaggregated emerging markets.
SH: OK, so we can see that blockchain is going to be useful and the regulation needs to be sorted out, but it all seems a long way off, still. I mean, the regulators don’t seem to be too bothered just yet. You know, the EU financial authority ESMA, for example, said recently that it’s too early to think about any regulatory changes needed. They said basically they’ll just keep an eye on it.
JR: Yes, look, the technology is being deployed now, this is happening now. And there are potentially some quick wins for traders in implementing it. For example, blockchain has been cited as significantly reducing compliance costs, it can definitely help transform “know your client – KYC” processes, anti-money laundering processes. These are really laborious at the moment, and expensive, and a regulatory requirement. So blockchain could automate a lot of that and make it much more efficient and transparent for participants and regulators alike.
HEE: Yes, I just want to add here that obviously regulators will want and need oversight of blockchain trading when it comes. But adding a referee to a peer-to-peer network goes against the ethos of everyone being equal – that will be a challenge for the community of blockchain technology people putting these things together.
JR: That’s exactly right, that’s the paradox here. But equally traders are going to need enforceable laws for the smart contracts that they’ll be using. Like I said before, it’s going to be difficult but it’s very important to have an enforceable rule of law behind a transaction, whichever network it sits on.
SH: Right, so James, how do you see that regulation playing out?
JR: I think the regulation has to keep pace with the technology. The technology looks like it’s going to find smaller, incremental inroads into trading systems, smaller components that will inter-operate with existing systems and environments. That seems to be the way markets are going. So it’s not going to be a big bang shift of environment, but regulators will have to understand these new components and the new environment, while providing for their operation with the old world, which is going to be quite complex.
SH: So, basically, interesting times ahead for both the early adopters and the regulators. Now, big question. Do either of you want to take a punt on when blockchain will be fully mainstream?
JR: Well, it depends on your definition of fully mainstream. The players involved at the moment are mainstream, they’re taking it seriously. We know the technology works from these early pilots. Technology and technologists can move quickly and increasingly we’re seeing exponentially. But the challenge comes in the business and regulatory cycle – the rest of us are just trying to keep up.
HEE: Yes I mean this is one important element of a whole raft of digital technologies coming in, so it’s not if, it’s when and to what extent, and certainly trading will be first in the queue because traders like to move quickly and adopt technology. Then microgrids will take off, and I’m hearing that we’ll have a much better idea within five years. In the meantime, we’re going to be keeping a close eye on all of this, in fact Platts is hosting its own conference focused on blockchain in London in November.
JR: Yes, that’s right, and we’re going to try and take a pretty wide view of all the implications affecting our markets and our customers and the people that are involved at that event. There are really significant cybersecurity, technology, implementation issues, and you know, the automation, and as Henry says, the related other technological changes are having a massive impact on trading and settlement workflows. That can present then some threats, but also a significant amount of opportunity for all people active in the market.
SH: OK, so you’re basically saying the conference is going to be really interesting, and everyone should join us there to discuss this in more depth.
HEE: That’s exactly what we’re saying!
SH: Well, luckily, you’ll be able to find more details about that conference soon on our website at platts.com. That’s all we’ve got time for today. Thank you so much Henry and James, and thank you for listening. Tune in next time for more Platts’ perspectives on policy.