Revolutionizing renewable energy certificate markets with tokenization

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The Paris Agreement sets out a global framework to avoid dangerous climate change by limiting global warming to well below 2°C (3.6°F) and pursuing efforts to limit it to 1.5°C (2.5°F). It also aims to strengthen countries’ ability to deal with the impacts of climate change and support them in their efforts.

More organizations are becoming increasingly aware of the sustainable business strategies and aligning their various business units towards the above goal. IBM has stated for more than a decade that climate change is a serious concern that warrants meaningful action on a global basis.

Currently, enterprises purchase Renewable Energy Certificates (REC) which represent 1MWh of zero-carbon electricity generated by another entity. The seller of REC could be outside the region or country the enterprise is from. The enterprises then use the RECs to offset their carbon footprint and be compliant with regulations on carbon emissions and green standards. In case of international (unbundled) trading, despite the carbon offset allowing enterprises to fulfill their obligations, RECs do not ensure the energy consumed have all come from renewable energy sources.

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Businesses are focusing their efforts on using technology to address this problem. Companies are looking to newer solutions to capture, analyze and report Environmental Sustainability Goals (ESG) information and reduce their environmental impact. A decentralized and immutable blockchain network, which leverages enhanced characteristics of distributed ledger technology (DLT) can greatly increase the adoption of energy certificates and ensure consumption closely matches the generation.

The existing landscape of renewable energy credits

Organizations are driven towards ESG initiatives with different motives. Generating renewable energy on-premises results in cost savings. There is considerable interest and focus from shareholders and employees for organizations to reduce overall carbon footprint, monitor and report the progress towards ESG. IDC’s survey data of global technology buyers shows that the majority (69%) of them agree or strongly agree that their digital infrastructure strategy is already an important enabler of their sustainability efforts.

The deregulation of energy markets in many countries encourages an increased market share for energy providers from the private sector. The participation of smaller entities than the traditional monopolistic governmental or semi-governmental ones results in an opportunity for peer-to-peer (P2P) — or with support of intermediaries — exchange of different amounts of energy and granularity of energy certificates. For example, energy certificates can be traded in smaller program time units (PTUs), such as the case of hourly certificates, becoming more in cadence with clearing and settlement. In a similar vein, the currently cumbersome carbon accounting process becomes simplified with significant cost savings, as smart metering and automations are introduced.

Increasingly stringent emissions laws and ambitious decarbonization targets have driven plans to develop commercial-scale blue hydrogen, derived from natural gas and carbon capture and storage (CCS) and green hydrogen, produced from renewables-based electrolysis processes. This has led to surge in hydrogen project announcements working in conjunction with both the gas and renewable sectors. The energy generation using hydrogen and other mixed sources have some CO2 emission associated and needs to be captured in the certificates.

A blend of recommendations on standardization of interoperable protocols from non-profit and for-profit organizations have been available on the market, seeking for early adopters and contributors to follow and/or contribute to them. The wide variety of implementations for tokenizing energy certificates, coupled with the fact that they are often at an infancy stage, call out for defining industry standards towards interoperability between networks in different geographical regions across the globe.

Where energy credits fit into the current market

The tremendous potential of democratizing the energy procurement process is not unnoticed by niche market players. In the interim, blockchain adoption is becoming more and more prevalent. Its unprecedented characteristics establish trust in a transparent, decentralized, immutable, and retrospectively verifiable setting, which is well-perceived by communities in the energy industry. A noteworthy market trend shows that self-funding ecosystems are leveraging Ethereum-based (ERC-20) solutions by introducing a dual layer of tokenization. The purpose for public platforms of supporting two layers of tokenization is to provide end-users access to use their platform and contribute to corporate revenues and create exchangeable tokens encapsulating energy certificates.

To create a financially sustainable ecosystem, proof-of-stake approaches are followed to incentivize early adopters to support a platform. For instance, Restart Energy Democracy (RED), an independent EU electricity and gas supply company, launched a decentralized energy supply platform to reward green energy certificates to consumers of renewable energy. They allow peer-to-peer direct trading between consumers and suppliers, while transaction costs are reduced. RED’s go-to-market strategy is based on two franchise tiers, the higher of which demands the ownership of a minimum number of tokens.

A similar system is being developed by Power Ledger. With its own unique trade matching algorithms, prosumers and consumers can transact available power equitably, without favoring any of the participants. Other characteristics of this platform include pegging of native tokens to a local unit of currency and aggregation of individual meters in a single transaction. The trading group can be configured by either their application host or Power Ledger. WePower also offers an alternative solution on exchanging energy certificates via its native WPR token and auctions. WePower launched a financial derivative product, called Contract for Difference, to mitigate risk in corporate power purchasing agreements (PPAs).

Making tokenization of energy credits more consumer focused

As organizations are by now committed to contribute to the Sustainable Development Goals (SDG), there is a need for an elegant solution which enables them to calculate carbon footprint and assist in creating their ESG reporting. The fractional market, created by entrepreneurial initiatives, is very confusing and might lead to slow adoption.

To revolutionize the existing high-cost and cumbersome energy certificates trading, we are working on a solution (enerT) to tokenize energy certificates using Hyperledger Fabric and Tokens-SDK. Tokenization of energy certificates in a DLT platform can offer an intelligent solution with regards to full disclosure certification of energy. In addition to the amount of energy generated by mixed sources, tokens created in the network could also store other useful characteristic such as CO2 emissions in the energy supply chain.

A tokenized energy marketplace would offer a wide range of trusted certificates in terms of energy types and origin. Such a network would allow suppliers and consumers to trade energy certificates efficiently and inexpensively. A tokenized certification unit would be like what the container did for the shipping industry.

Our enerT solution is being developed as an energy-friendly solution on a private, and permissioned-based technology to eliminate energy consumption by its network operations. Hyperledger Fabric’s energy-efficient consensus protocol is based on RAFT, a leader — follower approach. This factor leads network operations to consuming limited energy, compared to mining algorithms with mathematical puzzles (such as Proof-of-Work), often used in several public networks.

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