How Technology Is Changing the Market For Energy Commodities

by Steptoe & Johnson PLLC
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[author: Kent Bernhard*, Freelance Writer]

Kent Bernhard is a free-lance writer for The Business Journals.
Kent Bernhard is a free-lance writer for The Business Journals.

An experiment performed by a startup in Brooklyn, New York, in 2016 could be a harbinger of the future of the energy industry.

In the experiment, individuals were able to trade energy generated by solar panels between each other using the same blockchain technology that undergirds the bitcoin cryptocurrency. Though it was just a small test, the Brooklyn experiment showed blockchain technology is poised to become a major factor in the energy sector by shaking up the way commodities are traded.

“When you combine blockchain technology with … Internet of Things [IoT] and artificial intelligence, you'll be able to track commodities from the well head through the pipeline all the way to the consumer and collect information about, not just a movement, but who had possession of an asset at a particular point in time,” Daniel Nossa, an attorney at the Houston office of Steptoe & Johnson PLLC, recently told an industry group assembled for a Houston Business Journal panel.

Blockchain technology provides for a cryptographically secure, shared record of transactions, updated by a network of computers instead of a central authority. Every transaction within the system is secure, timestamped and linked with previous and subsequent transactions that can be seen by anyone with access to a given blockchain.

Nossa, who focuses on the energy sector, has followed the development of blockchain technology for the past two years, and expects the technology to become a major factor in the energy industry and beyond. The technology has implications for contracts and transactions online. But it can also be applied to transactions such as the movement of electricity from one player to another within the grid.

“One of the earliest applications in the energy space is the distributed grid model,” Nossa says. “The blockchain will facilitate the realization of distributed power.”

That’s because much of power grids are already digitized, which allows for transaction tracking from generator to end user. Tracking energy through blockchain technology and IoT could allow consumers to more closely monitor how much energy is in use and where it comes from.

But the electric grid is far from the only application for the technology.

Blockchain technology can also apply to the flow of natural gas or oil from producers to end users, or any number of other commodities transfers, by combining with sensors along the way. Such use can leach out inefficiencies on gathering data and reconciling transactions within current systems.

“With blockchain, there is more certainty,” Nossa says.

And while it may seem like this digitized, efficient trading platform is far off in the future, Nossa says Houston’s energy giants are already beginning to dip their toes into the technology.

Indeed, energy players around the world are beginning to apply blockchain to commodity trading. Earlier this year, Swiss firm Mercuria, one of the world’s largest commodity traders, used blockchain technology to facilitate the sale of a cargo shipment of African crude oil to Chinese petrochemical giant ChemChina.

Mercuria co-founder and chief executive Marco Dunand said blockchain technology would usher in “a digital transformation of the oil and gas industry.”

That’s one of the things Nossa sees, too, and he expects everyone from startups to energy giants in Houston to play a big role in that transformation.

*Kent Bernhard is a free-lance writer for The Business Journals.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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