Published on November 11th, 2018 | by Michael Barnard0
Smart Contracts Sweet Spots: What Does This Mean For Electricity Distribution Contracts? (Blockchain Report Excerpt)
November 11th, 2018 by Michael Barnard
Along with our regular daily clean tech news coverage, CleanTechnica also produces in-depth reports on various aspects of clean energy and clean transport. One of the emerging technologies we cover that isn’t directly a clean tech innovation is blockchain, which promises to be a catalyst for innovation in the green economy in the very near future. Blockchain is probably most widely known to the public as “having something to do with cryptocurrency and Bitcoin, right?,” which is partially correct, but the technology itself has a wide range of applications, some of which will be crucial in the fields of distributed renewable energy, grid management and energy storage, and smart contracts, among others.
The full report Blockchain – An Innovation Enabler for Clean Technology, which was published in July, is a deep dive into blockchain and its potential, and we will be posting more excerpts from the report over the coming weeks. (Read the last installment here.)
Electrical utilities which own the generation and distribution network will love smart contracts. They get all of the advantages while purchasers get most of the disadvantages. They have guaranteed payment, no accounts receivable problems, and the contracts will be between only two entities, so they’ll be simple. Right now, major jurisdictions like Germany or California see around a million customers unable to pay their bills on time annually, with resulting accounts receivable costs, loss of the money they spent on the electricity and getting it to the customers, and the costs of turning electricity off and on again, only some of which they can recover.
In many places, utilities are monopolies for purchase of electricity by consumers and businesses. I’m unaware of any situation where they don’t have a monopoly on distribution grids. That’s why they are typically regulated to prevent consumers from being gouged. But it’s easy to foresee utilities convincing regulators that smart contracts will lower overall rates and forcing smart contracts on consumers with risky financial situations. As stated, where a monopoly exists, the monopolist will be very happy with smart contracts.
I can’t say the same for any consumers of electricity, however. What’s in it for them? They get some convenience in that once the contract is set up, it’s automatically executed and paid, but that’s what direct deposit does already. I get notified when my electricity bill is due and how much it is, and don’t have to do anything else today. The value has to be outside of the contractual structure, something which takes the cost of electricity down a lot, or the stability of the electricity up a lot.
In developed countries, poorer customers who most often default, and so would be the natural target of monopolistic utilities, would be most hurt by the need to put money in up front. But pre-payment plans already exist for exactly that purpose, and have for a long time. This is just a different mechanism for them, and might be a better one.
Utilities which only own the distribution are still potentially going to be happy. They could easily have smart contracts with their customers and net 30 contracts with their suppliers. As necessary intermediaries who supply the grid, they don’t have to apply smart contracts on both sides unless they want to. Once again, they will only use smart contracts with suppliers if there is a significant reduction in price or a significant increase in other elements.
Generators would, of course, love smart contracts with purchasers of any sort. They get all the benefits from the contractual structure and very few downsides. Renewable electricity generators especially will love smart contracts, as they have no fuel suppliers to worry about and low costs. Fossil fuel generators, like utilities, will try to have smart contracts with purchasers and net 30 contracts with fuel suppliers.
It’s easy to see that any seller of electricity will be working hard to convince buyers of the advantages. And it’s easy to see a lot of buyers being convinced. From the penalties clauses value to buyers, however, we can start seeing some value propositions. Say an aluminum smelter — a very large consumer of electricity — enters into a smart contract with a utility for a certain amount of electricity at a certain time and voltage. If the utility doesn’t deliver it due to brownouts and the like, the smelter doesn’t pay as much.
Similarly, there’s a lot of construction in electrical generation and distribution, and smart contracts which automatically enforce penalties for various aspects of delivery could be advantageous.
If efficiencies for utilities are seen which substantially reduce their cost of doing business, for example in the order-to-cash process, and these savings are passed on to consumers, then there will be a transformation. That isn’t a given, however.
It’s in the developing world with poorly developed grids and poor contractual law where smart contracts for electricity might have value. If there is no order-to-cash system and grid operator in place, smart contracts between generators and purchasers would likely be able to use smart contracts to create a distributed version. It’s difficult to say where these pockets might be, however. In countries with poorly served rural regions, those rural regions are still regulated by the country’s laws. In failed states and lawless regions, it’s difficult to see what would prevent local warlords from merely ripping down the ramshackle wires that sprang up if they didn’t receive their cut.
As the sections on smart contracts show, blockchain-enabled smart contracts aren’t a home run in the utilities sector. There are many cases where the advantages are strongly one-sided. But that doesn’t mean that they have no value or that value won’t emerge.
The articles also show that caveat emptor, let the buyer beware, still applies in this emerging space. Most of the advantages of smart contracts accrue to the seller, so the buyer has to know exactly what advantages they are getting. Further, smart contracts will dominantly be developed and offered by sellers initially, and while they are very useful constructs, they are not necessarily a contract in the eyes of the law. Where a seller intentionally or unintentionally creates a bad contract which doesn’t resolve or resolves inappropriately in their favor, there’s little reason to believe that existing case law will be current and able to deal with disputes. And that’s in areas with systemic respect for contractual law. In areas of the world with little respect for contractual law, there will be very little available recourse.
Stay tuned for more excerpts from Blockchain – An Innovation Enabler for Clean Technology, or view the summary and request the full report at https://products.cleantechnica.com/reports/