While the renewable energy industry is enthusiastically eyeing how peer-to-peer transactions on the blockchain could open the door for additional distributed energy resources, regulators are eyeing these potential transactions closely and may soon be getting involved.
R. Whitney Johnson, Elliott J. Williams and Morten A. Lund, Contributors
Blockchain technology, and the variety of accompanying cryptocurrencies and tokens, appears to be a 21st century gold rush, replete with miners and speculation, and opening a new virtual frontier. Like the California Gold Rush, blockchain is luring villains as well as heroes, and fraudsters as well as entrepreneurs.
In 2017, regulators saddled up. Unlike the early days of the Internet, where regulators took a comparatively hands-off approach, many blockchain uses are inherently intertwined with money (cryptocurrencies) and are feeding on attention from consumers. Something more than a light touch from regulators seems imminent. There are several likely sources of regulation to consider for blockchain applications in renewable energy.
Blockchain is the new frontier in electronic record keeping. The technology is based on a list of records that are linked and secured using cryptography. Through blocks, nodes, miners, proof of work, and a distributed trustless network, transactions can be recorded and settled more cost-effectively, making viable a new world of smaller transactions between unaffiliated persons (think Uber, with peer-to-peer energy transactions). There are dozens of imaginable use cases for blockchain in the energy sector, and hundreds more beyond imagination in these early stages of technology development. Here are two use cases to illustrate potential regulatory touchpoints.
Regulation is familiar to the energy sector. We assume that anything related to energy distribution is or will be regulated. Adding blockchain to the mix likely won’t avert regulation of transacting energy. The existing regulatory framework ensures that utilities will have a say in whether the following examples come within the regulations — or whether existing regulations will need to change. Similarly, other elements of regulation may need to be put in place. The bottom line is that blockchain is potentially disruptive to all regulatory regimes, and the work and hurdles ahead are to determine the areas where regulation needs to be changed, added, or averted.
Electric Vehicle Use Case
Electric vehicles (EV) present blockchain application opportunities. EVs that sit idle during the workday represent significant battery storage capacity. By charging during off-peak times and discharging during peak times, or by discharging some power to another lesser-charged EV at a lower price than the current time of use (TOU) rate, EV battery storage capacity has potential — through small transactions — to impact energy use patterns. A blockchain (call it the Electric Vehicle Blockchain or EVB) can make tracking these transactions possible. Once the right structure is in place, transactions for charging or discharging may occur seamlessly on the EVB through a user-friendly app, including a transfer of funds (payment tokens) for energy used and an immutable record of the transaction. But there could be some bumps in the road.
Absent fundamental reform, utility regulations would appear to block the EVB platform from using the grid to transmit energy to other locations, just as utility rules have been an obstacle to developing distributed energy resources (DER) in other forms.
Securities regulators will take a close look at all representations of value (tokens) used on the EVB platform. An initial sale of payment tokens to users would be evaluated as a so-called initial coin offering (ICO), to determine whether the tokens are securities. Would the EVB offer exchange services (subject to exchange regulations) so that users can turn in their dollars for EVB payment tokens? Would the payment tokens be listed on other cryptocurrency exchanges for secondary trading? The commodity regulators may determine that the payment tokens, as well as the energy units purchased on the EVB, should be regulated as a commodity, as are most cryptocurrencies.
The EVB, depending on its structure, may store deposits of energy units or payment tokens (much like a financial institution) or may provide loans or credit (e.g., an account against which purchases of power can be made to charge an EV). Such transactions may subject the EVB to the full panoply of Treasury regulations, like a bank.
The IRS is already investigating failures to pay tax on gains and losses connected to cryptocurrencies. Similar concerns will arise with income from using EVB. Payments to EV owners, in whatever form they take, will be taxable gain, but likely taxed as a commodity. Sales tax, energy use tax, and specific transaction tax will apply, and likely multiply, in many states.
Consumer watchdogs, state and federal, will get involved at least on the backend, if not more proactively, to respond to inevitable failures and frauds: e.g., the EVB sells more of an EV’s charge than desired, payment tokens or energy tokens are inaccessible or stolen from a virtual wallet, or the EV owner receives less compensation than expected.
Finally, the environmental regulators cannot be forgotten as concerns grow about the increasing amounts of energy consumed simply to operate some types of blockchain. The regulators will, if blockchain use proliferates without significant improvements in efficiency, begin to weigh the environmental impact of the computing power against the benefits of our hypothetical EVB platform.
Renewable Energy Certificate Use Case
The authenticity of renewable energy certificates (REC), for both statutory programs and voluntary programs, has been the subject of . While some degree of ambiguity is tolerable for RECs (we cannot separate green electrons from brown electrons), various independent auditors, certification providers, and tracking systems have struggled to give the REC market confidence that the certificates being sold represent real green power.
A blockchain for RECs (call it B4RECs) has potential to boost buyer confidence in REC authenticity and, if successful, to provide premium REC product for verified near-in-time green energy consumed by local utilities and ratepayers.
RECs, where authorized by statute, are created under state law and administered by state environmental standards. The federal EPA encourages investment in RECs by offering resources and programs to entities that purchase “green power” as defined by the Green-e Energy REC verification provider. Thus, any B4RECs would have to comply with those state and federal standards.
The Federal Trade Commission establishes standards for using the label “renewable energy.” State rules require truth in advertising, including prior documentary substantiation of marketing claims before undertaking a marketing plan. To comply, B4RECs would verify that the data for its RECs (e.g., build date, nameplate capacity, etc.) are accurate.
This article’s attention to red tape and other obstacles should not overshadow the fact that blockchain + renewables = enormous opportunities for new markets and new ways of organizing power transactions. As the California Gold Rush opened the American West, and as the Internet opened virtual frontiers, we are confident that the blockchain frontier is opening new opportunities in renewable energy that can be successful in the near future.
R. Whitney “Whit” Johnson is a partner at Stoel Rives LLP and is chair of the firm’s Technology and Intellectual Property (IP) group. Elliott J. Williams is an IP litigator and patent attorney at Stoel Rives and a member of the firm’s energy initiative. Morten A. Lund, partner at Stoel Rives, serves as Chair of the Energy Storage Initiative and is the former Chair of the Solar Energy Initiative.