Three-legged stool: Blockchain, power purchasing agreements and renewable energy certificates - by Nadine Cino

January 23, 2018 - Design / Build
Nadine Cino,
TygaTrax and TygaBox

My personal belief is that capitalism mimics mother nature in its ruthless efficiency, and that, absent external influence, efficiency compels markets. It transforms resistance, starting with — “no way” to acceptance — “it’s the new norm.” My expectation is that the blockchain will become the “new norm” foundational database supporting most types of transactions in the not-so-distant future, based not on its reputational fame in cryptocurrency, but rather, on its’ flexibility as a transaction-recording tool, adaptable to a myriad of applications in which transparency and accountability are important to a successful, verifiable transaction.

In the simplest of terms, a blockchain is a tool for recording transactions. It is a “shared, encrypted ledger that is maintained by a network of computers which verify all transactions. Each user can access the ledger, and there is no single authority.”1 

This tool holds great promise with respect to uncovering the true value of a “three-legged stool” by compounding the individual values of: Power Purchasing Agreements (PPAs), clean energy sourcing and carbon credit accounting powerfully into a comprehensive, optimized and verifiable energy program.  

“On an electricity grid, electrons generated from the sun, wind, or other renewable sources are indistinguishable from those generated by fossil fuels. Keeping track of how much clean energy is produced relies on creating a system of tradable certificates. Currently, renewable energy generation is tracked using energy attribute certificates (EACs), and information sharing among market participants is a manual process.

When a renewable-power plant generates a unit of electricity today, a meter spits out data that gets logged in a spreadsheet. The spreadsheet is then sent to a registry provider, where the data gets entered into a new system and a certificate is created. A second set of intermediaries brokers deals between buyers and sellers of these certificates, and yet another party verifies the certificates after they are purchased.

Such a byzantine system racks up transaction costs, while leaving plenty of room for accounting errors that can range from honest mistakes to outright fraud. The lack of transparency also scares many people off entirely.”2 What if the meter wrote the data directly to a blockchain instead? 

“A PPA at its core is a contract between two parties where one party sells both electricity and renewable energy certificates (RECs) to another party. In corporate renewable energy PPAs, the “seller” is often the developer or project owner, the “buyer” (often called the “offtaker”) is the commercial & industrial (C&I) entity. C&I renewable energy PPAs can take two primary forms – physical or financial (the latter often referred to as “virtual.”)

Unlike a physical PPA, a virtual PPA (VPPA) is a financial contract rather than a contract for power. It is a hedge instrument, most effectively used to protect against future downside risk of energy price volatility. The offtaker does not receive, or take legal title to the electricity, and in this way, it is a “virtual” power purchase agreement. 

Despite these shared benefits, physical and virtual PPAs do differ in some material ways.

Physical PPAs require that the offtaker obtain power marketing authority from the Federal Energy Regulatory Commission (FERC) to purchase wholesale power from the power producer. However, because no power is changing hands in a VPPA, the offtaker does not require FERC authority.

Although regulatory requirements for VPPAs are still being formed, the prevailing view is that these contracts are “swap” agreements and therefore bound by Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank,”) which includes reporting, recordkeeping and registration requirements for swap transactions.” 3

Again – what if the meter wrote the data directly to the blockchain instead? 

How then could compliance be managed? How then could risk be mitigated?

Back to our three-legged stool example, imagine incorporating “design thinking” into energy strategy. Its “fail fast | fail often” philosophy would allow companies to test, optimize and continuously improve their energy programs to the benefit of their bottom lines as well as to the balance sheet of the planet. 

With the increased autonomy that blockchain introduces, companies may find it easier to accomplish their strategic goals — and at a lower cost and time commitment – illustrating how efficiency compels markets.

Footnotes:

1. & 2. https://www.technologyreview.com/s/609077/how-blockchain-could-give-us-a-smarter-energy-grid/MIT [1], [2]

3. https://3degreesinc.com/ppas-power-purchase-agreements/

Nadine Cino LEED AP, is CEO and co-inventor of both TygaTrax and TygaBox, New York, N.Y.

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