Everybody is currently talking about the concept "Blockchain". The technology promises data sovereignty and direct interaction between the parties involved, without the need for an intermediary. The interaction is not limited to transactions, but includes applications and operations which are handled by the architecture of the Blockchain technology in a secure, traceable and efficient way. Blockchain technology also has great potential for various applications in the energy sector. According to experts, Blockchain technology has the potential to bring a paradigm shift to real-time energy management with billions of interconnected devices. Still, the maturity of the technology has to overcome current limitations. In addition, the current legal framework presents major challenges for the actors involved. This legal update gives an overview of the function and advantages of the Blockchain technology, its applications in the energy sector and the current legal and regulatory framework.
What is Blockchain?
Blockchains can be summarised (simplified) as distributed databases which are managed by the users themselves. The purpose of these databases is to store and display information, especially transactions, in a decentralised and unalterable manner. If an information or transaction is transmitted to the Blockchain network, it is stored on all computers in the Blockchain network. This is done by combining several transactions into blocks. These blocks of information are then verified by the network participants themselves according to specific rules. If the majority of the network verifies the information, the entire block is encrypted and stored unchangeably in the Blockchain. Each block contains the checksum of the previous block and is therefore "inseparably" connected to it - this is how the Blockchain is created.
Through this process, the data stored in the Blockchain is always just expanded, but not changed or overwritten. This way, the entire transaction history can be traced for each user of the Blockchain.
As a result, the data stored in the Blockchain is practically tamper-proof. In order to change the data without anyone noticing, the whole Blockchain would have to be changed, so the checksums of all blocks would be correct again.
Types of Blockchain
While the basic technology remains the same, a distinction can be made between different types of Blockchains. There are public, private and consortial Blockchains: In a public Blockchain, an infinite number of network participants can participate, all of whom have the same privileges and can validate transactions. Private Blockchains, on the other hand, can only be used by a selected and limited number of network participants; furthermore, not all participants have the same privileges within the Blockchain. There is also often a central instance within a private Blockchain. The consortial Blockchain ("Special-Purpose-Blockchain") is a semi-private Blockchain and thus a compromise between the public and private Blockchain.
The basic concept of the Blockchain has been around for a few years now - but it was not widely known until the development of the cryptocurrency "Bitcoin" as the first real "application" of the Blockchain in 2008. The basic idea behind Bitcoin is to create a functional currency which is independent from banks and other central institutions. Transactions with the cryptocurrency Bitcoin are then processed via a Blockchain. Bitcoin and Blockchain are therefore not - as is often assumed - equal. Bitcoin is merely an application of the Blockchain technology.
Ether is another cryptocurrency which has become widely known in the market. This currency is used for payments within Ethereum Blockchains based on the Bitcoin concept. The concept of cryptocurrencies also allows for the method of “Initial Coin Offering” ("ICO"), a kind of crowdfunding whereby tokens are sold to investors, thus financing the project. Basically, the tokens can represent any legal relationship or any structure; for example, they can serve as a newly issued cryptocurrency, revenue shares or rights of use for the project to be financed.
The potential of cryptocurrencies and tokenisation can also be used in the energy sector. For example, SolarCoin already exists - a Blockchain-based token which PV system operators receive for each MWh of solar energy produced1 . SolarCoins can be traded via Blockchain.
The Ethereum Blockchain not only enables the processing of transactions, but also the programming of so-called Smart Contracts. These are not (essentially) contracts in the legal sense, but automatically executable program codes which represent predefined transaction rules. The Smart Contract verifies that all previously defined conditions are fulfilled. If this is the case, the transaction is automatically processed via a Blockchain. For example, in the case of a vehicle leased under a Smart Contract, the engine could only be started if the leasing instalment had been paid beforehand - a condition which the Smart Contract checks automatically.
By using Smart Contracts, processes can be automated and the use of an intermediary is no longer necessary, which ultimately leads to cost savings.
Blockchain in the energy sector - advantages and applications
Up to now, Blockchain technology has mainly attracted attention in the financial sector. However, the energy sector is also considered to be an area in which the Blockchain has a particularly high potential. A study conducted by the German energy agency dena in 20162 identified peer-to-peer trading (i.e. user to user) including the financial settlement of such transactions, clearing and settlement, and proof of origin as promising areas of application for Blockchain technology in the energy sector.
Blockchain technology has the potential to facilitate data exchange in an increasingly decentralised energy system as well as to accelerate processes. It enables an efficient, transparent and secure exchange of information. This opens up new possibilities for companies, for example, for optimising processes in electricity and gas wholesale, for charging infrastructure and payment systems in the field of electromobility, or for certifying energy products. In combination with the digitalisation of metering, Blockchain technology supports new forms of product differentiation, especially with regard to generation type, location and time3.
It is therefore not surprising that various energy supply companies as well as startups are working on the development and testing of Blockchain solutions for the energy sector. The transmission grid operator TenneT TSO GmbH together with sonnen is currently using decentralised home storage facilities which are connected via a Blockchain to stabilise the electricity grid4. The aim is to test the extent to which emergency measures in the event of network shortages, such as regulating wind farms, can be reduced.
The use of Blockchain solutions is also already being tested in the field of electromobility. In this context, the technology can be used to optimise the communication between charging stations and electric vehicles as well as the handling of charging processes and transactions. One pilot project in this area is MotionWerk's Share&Charge project5 , the first e-mobility community platform with Blockchain technology. The advantages of Blockchain - direct and anonymous trading of different electricity market products without recourse to a marketplace/intermediary - also offer great potential for electricity wholesale transactions. The Blockchain industry initiative "Enerchain"6 has been developing a digital marketplace for Blockchain-based commodities since 2016.
The pilot projects mentioned above give an impression of how diverse the application possibilities of Blockchain technology are and how distinctive the Blockchain landscape in the energy sector already is.
Decentralised energy supply: Neighbourhood and microgrids models
The possibility of using Blockchain technology to process transactions "directly", i.e. without intermediaries, makes the technology particularly interesting for small-scale trading of green, regional electricity. With the decentralisation of energy production, the number of so-called "prosumers", i.e. electricity consumers who are also producers of electrical energy, is steadily increasing. With the help of Blockchain, transactions between prosumers can be managed and processed without intermediaries and at low transaction costs - possibly by using Smart Contracts.
The use of Blockchain technology in neighbourhood models is already being tested in several pilot projects. The Brooklyn Microgrid7 in New York City, launched in 2016, is probably the best-known project. The startup LO3 Energy has developed a peer-to-peer platform which allows participating prosumers to trade solar power amongst each other. The transactions are executed and documented automatically between the participants. The project shows how a decentralised, autonomous (self-)supply could look like in the future.
Pilot projects also have already been launched in Germany. For example, the Essen-based Blockchain-Startup Conjoule GmbH offers a digital platform enabling operators of a PV system to trade their generated electricity directly in the neighbourhood - transactions are processed via Blockchain8. The project has been tested in Essen Kettwig and Mülheim a. d. Ruhr since October 2016.
With a similar approach, Salzburg AG together with Verbund AG and “Zentrum für sichere Energieinformatik” (ZSE) are currently testing how the internal consumption in tenant electricity models can be increased by using a Blockchain to enable residents in multi-party houses to trade solar power directly amongst each other9.
The successful application and implementation of Blockchain solutions in the energy sector crucially depends on the legal framework. The current regulatory framework in Germany provides strong challenges for the implementation of Blockchain solutions:
Questions arise, for example, with regard to the stipulations of general contract law concerning the conclusion, content and processing resp. reversal of (energy supply) contracts. The unchangeability of the transaction history is particularly difficult. This property, which characterises the Blockchain technology, stands in contradiction to German civil law, which explicitly provides a multitude of possibilities to dissolve contracts, for example by resignation or (retrospective) appeal. However, a transaction once stored in Blockchain in principle cannot be modified or deleted. Consequently, the question arises, how the Blockchain technology and the current legal framework can be reconciled. In this case, so-called "reverse transactions", i.e. fictitious transactions which introduce counter-transactions into the chain until the "initial" status is restored, would then have to take place. This tension is also evident in the event of performance disruptions and if, for example, transactions are stored in the Blockchain which subsequently prove to be invalid from the beginning due to breach of a legal prohibition (§ 134 German Civil Code, “BGB”) or due to immorality (§138 BGB).
In addition, the law of the General Terms and Conditions, §§ 305 ff. BGB, has to be observed, in particular with regard to trading based on Smart Contracts. Here, for example, questions arise in connection with the handling of conflicting or intersecting terms and conditions. Also, the question of who is liable for improper or even non-performance, if this is caused by a (technical) system error in the Blockchain, has not yet been solved: Should it be the miner who validated the transaction? Or the participants of the peer-to-peer network as joint operators, who could therefore be liable as partners of a private company? Further legal pitfalls can arise from the requirements of data protection law (keyword: "permanent traceability") and tax law.
In addition, the use of Blockchain technology in the energy sector raises a number of regulatory questions. The following are examples of key regulatory challenges in Blockchain-based peer-to-peer trading: The Prosumer as an energy producer will normally be an energy supply company ("EVU") within the meaning of § 3 No. 18 Alt. 1 Energy Industry Law “EnWG” respectively an electricity supply company ("EltVU") within the meaning of Section 3 No. 20 Renewable Energy Sources Act 2017 “EEG 2017”, which supplies other prosumers, i.e. regularly end users, with energy. As a result, the prosumer is basically subject to the obligations the law imposes on the status of an EVU respectively EltVU. This includes, among other things, the obligation laid down in § 5 EnWG to notify the Federal Network Agency ("BNetzA") without delay of the commencement and termination of deliveries to household customers. In addition to announcing the commencement and termination of the activity, the prosumer must also present his personal, technical and economic performance to the BNetzA. In this respect it is probably problematic that the legislator had a "classic" EVU in mind when determining the obligation to provide evidence under § 5 EnWG. It will therefore regularly be difficult for the prosumer to prove his personal, technical and economic performance in this sense.
Furthermore, as an EVU or EltVU, the prosumer is subject to storage, notification and publication obligations, e.g. in accordance with §§ 70,71,74 EEG 2017 and the Regulation on the register for market master data “Marktstammdatenregisterverordnung”. In addition, as the operator of an energy generation plant, the prosumer will be plant operator “Anlagenbetreiber” as defined in Section 3 No. 2 EEG 2017, with the consequence that he will be subject to the statutory obligations attached to it.
Further obligations may arise from the existing legal requirements for IT security, a prosumer has to comply with in accordance with the current legal situation.
Regardless of whether or with which efforts the prosumers within a peer-to-peer network would be able to fulfil these obligations, their basic classification as EVU/EltVU/Anlagenbetreiber is likely to have a considerable deterrent effect, with the consequence that potential participants in a peer-to-peer network might ultimately refrain from participating. In addition, the legal requirements of §§ 40 ff. EnWG regarding the content and processing of energy supply contracts, invoicing and the pricing of energy supplies have to be observed. The same applies to the legal requirements for changing suppliers, which result from § 20a EnWG and the business processes for supplying customers with electricity ("GPKE"). In addition, it is also necessary to clarify who will act as the balancing group manager on a peer-to-peer platform.
Models involving service providers as a solution?
It appears that a fully decentralised, Blockchain-based peer-to-peer trading platform would be difficult to reconcile within the existing legal framework. A service model can be used to exploit the advantages of Blockchain technology and to bundle the related legal and regulatory risks: A service provider makes a Blockchain-based trading platform available to prosumers. Via this trading platform, the prosumers could trade electrical energy among each other using Smart Contracts. The service provider would assume the legal and regulatory duties as well as the role of the balancing group manager.
A similar concept has already been tested since late 2017 by the Wuppertal public utilities. They are the world's first public utility company to operate a Blockchain-based green electricity marketplace where customers can purchase electricity directly from local green electricity suppliers. In this project, the public utility company as a service provider takes care of the regulatory duties.
The Future of Blockchain
In order to fully exploit the potential of Blockchain technology in the energy sector, it is necessary to create a clear legal framework on the foundation of which Blockchain-based solutions can be implemented and applied in a lawful manner. This requires, in particular, action at political level, more precisely: an adaptation of the legal framework. This could for example involve the introduction of the "prosumer" as a legally defined market participant with an appropriate list of duties. Furthermore, legal and regulatory requirements must be worded in a technology-neutral manner, in particular the requirements for data preservation and provision. The existing market rules for small-scale electricity trading also need to be adjusted.
The Blockchain Federal Association (“Blockchain Bundesverband”)10 has worked for this purpose since June 2017. As early as October 2017, the Association published a position paper11 in which existing problem areas for the application of Blockchain technology in Germany were identified and concrete (political) recommendations for action were presented. Initial achievements of the work of the Federal Blockchain Association and other interest groups have already become visible: In the recently signed coalition agreement between CDU/CSU and SPD, core demands of the federal association have been taken into account. Specifically, the agreement states that the Federal Government would like to "develop a comprehensive Blockchain strategy" and "promote an appropriate legal framework for trading cryptocurrencies and tokens at both European and international level" in order to "exploit the potential of Blockchain technology and prevent misuse".
The Federal Government also wants to test "innovative technologies such as Distributed Ledger (Blockchain) in order to examine their use for government work”. The aim of such pilot projects is to gather information "so that a legal framework can be created on the basis of these experiences". These intentions of the Federal Government demonstrate that politicians, too, have recognised the benefits and enormous potential of Blockchain technology.
Blockchain technology is also being considered at EU level. The European Commission recently set up the “EU Blockchain Observatory and Forum”12 . The aim of this initiative is to monitor developments in this area, to promote actors and to strengthen the European cooperation.
The recent political developments at national and European level are to be welcomed with a view to the huge promises the Blockchain technology holds for the energy sector. Now this potential must be exploited, and for this to happen, a clear legal framework is needed.
Dr. Carmen Schneider Partner, Head of Energy Group (Germany)
The author is a partner at DWF Germany in Cologne and head of the practice group Energy Law. She is a member of the Energy Committee of the Blockchain Federal Association. The author would like to thank Dr. Ilka Mainz for her support in preparing this legal update.
If you have any questions regarding this legal update, please feel free to contact Dr. Carmen Schneider.
T + 49 (0) 221 534098105
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3BDEW, Blockchain in der Energiewirtschaft, Kapitel 3.