Blockchain is the hottest thing since Y2K. Everyone is talking about it, many companies are investing in it and lots of tech companies have built-out huge practices dedicated to creating practical applications for it (Deloitte said this week they have 1000 people working fulltime on blockchain across multiple industries). Given all this attention, it’s clearly bound to be a giant game changer in the global energy markets…right?
5 Reasons Blockchain Will Succeed in the Global Energy Markets
Number 1
Huge investments are pouring into the space led by energy industry powerhouses like BP, Shell and Mercuria; tech industry players like IBM and banking concerns like ING and Societe Generale…If money can make a technology work, this thing is a guaranteed success.
Number 2
Blockchain is a proven platform. After all, some form of blockchain runs every crypto currency market around the world.
Number 3
Related to 1…early results from industry trials in the global crude trading markets indicate that it is already proven successful at reducing settlement times by as much as 30% per transaction.
Number 4
The freight and water-borne energy shipping markets need this. These are old, paper heavy industries with lots of manual processes and interventions along the way. Having an automated process that ensures performance and trust is long overdue.
Number 5
Distributed ledger technology ensures trust and decentralizes data…reducing multiple risks for those that participate. Bottom line, many energy markets/industries could leverage this capability and are willing to invest in ensuring it works.
5 Reasons Blockchain Will NOT Succeed in the Global Energy Markets
Number 1
Blockchain is not a real-time system and there are significant issues related latency as the system updates with new data; and, as user counts (nodes) on a blockchain network grow, the latency issues grow even larger.
Number 2
Related to reason 1, blockchain is a terrible database and retrieving historical information is difficult and time consuming. At the end of the day, anyone using blockchain solutions are probably going to have to rely on old tech systems based on relational databases to replicate the data from the blockchain for operational purposes, which can undercut blockchains value prop.
Number 3
Any deal/logistics management/smart contract system built on blockchain requires the establishment of standards for how it will operate, including contract terms, types/structures of deals that can be consummated, pricing conventions, etc. Given the experiences in the US natural gas market where a federal regulator (FERC) and a government/industry consortium (GISB/NAESB) are still struggling with standards after more than 20 years of trying, the creation of standards across multiple market regions/geographies/companies may be the biggest stumbling point for wide adoption of blockchain in many markets.
Number 4
There are powerful players that could be damaged if it were to be broadly successful. In particular, trading exchanges could be the biggest losers and they are unlikely to sit back and let a few blockchain consortia totally undermine their businesses. It’s interesting that the largest energy exchanges have been largely silent on blockchain as the biggest players in the energy industry invest in creating something that could very well put them out of business; or at a minimum, cost them a huge chunk of liquidity and profit. Though some of these exchanges have been having behind the scenes discussions with a few industry players recently, it’s unclear what their counter strategy might be, or if they’re even really working on something. Or, could it be that they’re just not worried about it? Unlikely.
Number 5
Expectations. Given the money and hype that have flowed into blockchain over the last 12 months, whatever comes from the various initiatives and research efforts will never live up to the level of expectations that have been created around it. When all is said and done, is blockchain destined to be the next Segway or virtual reality device…cool tech that performs its function but has developed real market share far short of its early expectations (apart from mall cops and video gamers)?
So, what’s it going to be – Success or Failure?
There is little question that some blockchain applications will find success, but how much? Is there a future in which blockchain networks replace all existing exchanges, logistics scheduling systems, regulatory reporting solutions and the hundreds of systems used in today’s energy markets? Of course not, and I don’t really think anyone knowledgeable about these markets and blockchain technology believes that (except those with stupid money that bid up Long Island Iced Tea Company when they changed their name Long Blockchain Company).
IMHO, I think we will find successful blockchain solutions in the global freight markets, including oil, oil products and LNG within the next few years (even less for the current consortiums noted above). Shipping involves a lot of antiquated processes and paper shuffling that are the product of hundreds of years of evolution. It’s a market that screams out for a new tech solution – and given the slow pace of those markets versus say power or natural gas, the current technical limitations of blockchain applications aren’t a real problem.
However, for fast moving gas and power markets, blockchain has yet to demonstrate an ability to overcome its latency issues…though it’s quite possible that could change with continuing advancements in technology. Still, even if blockchain can get to near real-time distribution of data across its network, the question is why, and how, to use it? Is the US natural gas industry clambering for a new blockchain-based EnronOnline or DynegyDirect? Are there real efficiencies that can be gained by shutting down the ISO/RTO systems (and in the process throwing out billions of invested dollars) and replacing them with something built around distributed ledger technologies? Will pipelines and transmission operators invest tens or hundreds of millions of dollars to replace their existing nominations/scheduling systems with a blockchain based look-alikes? Of course not.
Undoubtedly, there will be some very compelling use cases emerge over time and distributed ledger technologies will become a part of the broader technology landscape in energy. However, at least for the US/North American markets, until power generation becomes much distributed and more reliant on microgrids, and natural gas goes the way of the dinosaur, it’s unlikely that a sea change in technology is going to occur in these markets. What we have in place now works pretty well and its relative efficiency in keeping the lights on and our houses warm would seem to preclude the huge investments required to replace any significant portion of the systems that underlay these markets.
All that being said, blockchain tech could find fertile ground in gas, power and other commodity markets in developing countries and regions around the globe. Blockchain’s greatest value proposition is that it creates commercial trust among its users, and in developing countries that don’t yet have robust and centralized banking, financial services and regulatory structures, the commercial surety provided by blockchain could create a real and compelling value proposition.
The European energy markets are also increasingly interested in blockchain solutions for the liberalizing power market heavily saturated with renewables sources. However, even in this sophisticated market region, early investors are finding numerous hurdles with legal structures, operational issues and regulators. Outside of microgrids and potentially a few industry-led consortiums for managing some OTC trading, blockchain’s success is far from assured on that continent.
What’s your opinion? Let us know here.
