Author: Dr Mark van Rijmenam

In this era of climate change, tokenizing energy can be an important solution in fighting climate change. Therefore, on 3 October 2022, the 2Tokens Foundation organized their 7th round table discussion to discuss this critical topic. A curated group of energy and token experts gathered at The Green Village on the campus of Technical University Delft to discuss the how, what and why of tokenizing energy.

The current energy sector is heavily regulated and lacks transparency, but the increasing digitalization can improve traditional industries and bring control and transparency back to the end-user while at the same time creating a more renewable energy system.

The European Union acknowledges this, as is illustrated by recent EU regulations which recognize the importance of "prosumers," or consumers who also produce energy. Although numerous hurdles exist, the EU aims to democratise energy systems through communities and sees a future energy market which is likely decentralized.

The objective of the round table was to discuss these challenges and the various topics covered in the discussions included local energy markets, legal and regulatory issues, governance, fractional ownership, carbon credits, and technology.

What does tokenizing energy mean?

Tokenizing an energy system is the process of representing a physical asset, such as a unit of energy, as a digital token on a blockchain. It allows for creating a decentralized and secure ledger of energy transactions, which can help improve the energy system's overall efficiency and transparency. The use of smart contracts can automate specific processes and reduce the need for intermediaries, further enhancing the efficiency of the system. In addition, smart meters and distributed ledger technologies can enable real-time energy allocation based on actual consumption, which can help reduce disparities between supply and demand.

Tokenization can have a number of benefits for the energy sector, including increased efficiency, greater transparency, and improved security. To create a decentralized energy grid, you first need to create a digital token representing a unit of energy on a blockchain platform. This token could then be used as a means of exchange within the energy grid, allowing for the buying and selling of energy between different parties transparently and securely. In 2021, the Energy Working Group was started, which aims to develop the infrastructure that supports an energy token that integrates with existing systems. The first phase of the working group was aimed at the adoption of shared solar assets through tokenization by several partners. The work resulted in the whitepaper "Power of the Many," presenting a novel approach to engaging citizens in the global energy transition.

Power of the many

In 2015, 193 countries ratified the Paris Agreement to strengthen the global response to climate change. One of the main goals of the transition is to increase the use of renewable energy sources, such as solar power, which has become one of the cheapest forms of energy generation.

However, the traditional model of large-scale solar power plants has several drawbacks, including a lack of citizen engagement and potential inequalities in the distribution of benefits. To address these issues, the whitepaper proposes the creation of "Energy Communities" in which citizens can become co-owners of solar power plants. This approach is intended to reduce barriers to the adoption of solar power, such as the "NIMBY" (not-in-my-backyard) attitude, and provide benefits to a broader range of people, including those unable to install solar panels on their property.

The whitepaper discusses a system for tokenizingsolar power plants to facilitate the creation of these Energy Communities. The group has completed the first phase of its work, which involved developing a system for tokenizing solar parks. In the next phase, the group plans to continue exploring tokenization in the energy sector, including the tokenization of energy generation, data collection and management, and other aspects of energy governance. You can download the whitepaper here.

An Energizing Round Table

Decentralized energy systems, which allow for the local production, storage, and distribution of energy, have the potential to increase efficiency, reduce carbon emissions, and increase resilience. However, the complexity of existing regulations and the need for legal frameworks for decentralized systems can be significant obstacles to adopting these systems.

To overcome these obstacles and facilitate the transition to decentralized energy, there is a need for a better understanding and simplification of regulations, as well as the development of decentralized autonomous organizations (DAOs) and the use of blockchain technology. Local markets, carbon credits, and the use of energy tokens can play a role in making decentralized energy systems more viable and efficient.

The objective of the roundtable event was to further explore the challenges that lie ahead in achieving a decentralized energy system. Let’s discuss the outcomes of each topic:

Carbon credits 

Carbon credits are a way of incentivizing people and companies to reduce their CO2 emissions. The main reason for their existence is to put a price on CO2 emissions, which helps the energy transition to cleaner forms of energy. Rational actors are incentivized to reduce their emissions to save money by placing a price on emissions, which will also make the market for clean energy more attractive to investors.

One of the pitfalls of carbon credits is that, as long as it is cheaper to invest in fossil fuels, there will always be people and companies that choose this option. In order to overcome this, people need an incentive to change their behavior. One way to do this is to turn carbon credits into a resource, which changes the market and makes people seek to use them.

To make the market for carbon credits effective, standards and transparency are required, ensuring the credits' quality, and creating a liquid market for them. Additionally, smart meters need to be improved to accurately measure the amount of CO2 offset by clean energy projects.

There are several ways that the market for carbon credits can be improved. One way is to put chips in solar panels, which can be supported by the insurance industry and discussed in detail in the whitepaper mentioned above. This reduces risks and makes solar panels more attractive to investors. Another way is to create a democratized marketplace where people can easily buy and sell carbon credits. This can be done through gamification, incentivizing local communities, and creating a "buy to burn" market (avoiding people buying carbon credits to produce more carbon). An example of an early marketplace like this is carbonkiller.org, although these still need to be fully implemented.

Energy Markets 

In the discussion around decentralized energy markets, one question was whether or not large-scale market makers would become obsolete. In this discussion, "energy markets" refer specifically to the electricity market.

The group argued that market makers will still be needed in a decentralized market and that there will likely be many. In the current market, examples of market makers include APEX and derivative exchanges. Localized markets could exist on a house scale, and there are already protocols like D3A.io designed for bottom-up market making.

However, the market makers can be decentralized; for example, grid operators and electricity providers like Vattenfall managing their own portfolios. The most interesting part of this discussion is the question of balance and balance responsibility - whether or not this can be delegated to consumers.

The discussion also touched on the need for storage to shut off the grid and the challenges of controlling frequency in a decentralized market. A reputation score or credit system could be needed for assets that contribute to the grid to overcome this, and that blockchain technology could potentially be used for this.

It was generally agreed that some price mechanism is needed to stabilize the market, whether through market makers or some other system. The situation is complex, but there is a clear need for some market makers in decentralized energy markets.

It was also noted that not everyone could invest in their own electric vehicle and solar systems and that a market maker would be needed to set prices for those who cannot. Moreover, a marketplace to allow consumers to invest in clean energy, even if they do not have the real estate to do so, could be desirable, which is linked to the fractional ownership of energy-generating assets.

Fractional ownership of energy

Fractional ownership of energy-generating assets can help reduce energy poverty by giving people access to energy at a lower cost. Fractional ownership allows a group of people to share the ownership of an asset, such as a solar panel, and share the benefits of energy production. It can reduce dependence on energy suppliers and add liquidity to an otherwise illiquid market.

The necessary infrastructure must be in place to offer fractional renewable energy ownership, including access to solar panel or wind turbine ownership, production, storage, energy consumption, and a connection to the grid. Incentive schemes, such as using balance tokens, can also encourage people to use energy at low prices. Consumers investing in solar panels constructed in their neighborhoods could benefit from free clean energy, even if they cannot build them on their own real estate. This could be particularly useful for people who rent but want to contribute to a cleaner future. Using a tokenized system, they could sell the tokens on the market if they decide to move. As such, fractional ownership of energy would allow anyone to become energy-independent.

Governance

The European Union has set a target of reducing carbon emissions by 55% by 2030, and the need for energy sovereignty has become more pressing due to the war in Ukraine. The renewable energy sector is crucial in achieving these goals, and solar power has become the cheapest source of energy generation. The EU Green Deal and national climate agreements call for 50% local ownership and control over the development of solar parks.

However, several challenges need to be addressed to accelerate the adoption of solar power. One major issue is the lack of public support, as many people feel excluded when solar parks are imposed on them without their input. Additionally, many people lack the skills, awareness, and knowledge to participate in the energy transition. Furthermore, the lack of digitalization in the energy sector means that real-time data on energy generation and consumption is unavailable.

To address these challenges, the energy token working group propose a solution that empowers local stakeholders to finance and manage community-owned solar parks by creating Decentralized Energy Communities (DECs). The group proposes a decentralized autonomous organization (DAO) that supports the creation of DECs, which enable local stakeholders to regain control over energy finance, generation, consumption, sharing, and trading.

Local 4 Local

The discussion focused on energy communities and the concept of Local 4 Local, which emphasizes the importance of balancing and keeping energy operations local to reduce emissions and increase efficiency. The goal is to create a resilient and decentralized system, focusing on optimizing local assets and reducing the need for transport.

The participants discussed the challenges and potential solutions for creating local market models, including the need for new business models and software that enables communities to administer and trade energy locally. They also discussed the potential role of blockchain technology in collecting and sharing data on energy production and consumption.

The concept of a "layered energy system" or "nested design" is gaining traction to optimize available system flexibility in the transition to a decentralized energy system. This approach involves every layer of the system optimizing itself before balancing any sharing any remaining energy with the next level. The goal is to maximize social benefit and efficiency and increase resilience through
decentralization.

One question with this approach is what the"top" level of the system would be - the individual prosumer or the overall system. The consensus among the experts is that the top level should be the overall system, with local markets serving as the intermediate layer between individual prosumers and the larger system.

However, some raised the concern that running local markets at a faster interval (e.g., 5 minutes) than the wholesale market (15 minutes) could be used to manipulate the larger market. Labeled energy tokens could be issued to trade carbon insets/offsets and other proof of source or origin values. Thanks to its immutable ledger, distributed consensus model, and clear and enforced market rules, blockchain could provide a cheap option for system operators. Smart meters, operated by an independent entity, could serve as the "oracle" for settlement, which would be a separate settlement process and have nothing to do with the actual energy market.

The idea of sharing in local markets is gaining popularity because it allows for the optimal use of available system flexibility and more efficient decentralization than centralization. It also increases resilience and has a more positive social impact. The business case for local markets is still unclear, as it is not immediately obvious why one would trade locally when the same benefits could be obtained by trading with the larger system. However, local markets could be cheaper if energy tax and congestion fees were calculated and collected at the community boundary instead of the individual level.

Legal and Regulatory

The statement "regulation is the main obstacle for a transition to decentralized energy systems" was the focus of the last table. The rules surrounding energy production are the biggest obstacle to transitioning to decentralized energy systems. Many obstacles stem from understanding and interpreting the laws and regulations surrounding the energy transition. Legal and regulatory frameworks create a lot of unnecessary usage due to their complexity, which can impact a business case. For example, local-level regulation should be considered in the context of decentralized energy, but current legislation prevents this.

The discussion also revolved around what should be regulated and why. There are a few legal frameworks that can make a tokenization model successful. The question of why so much regulation is needed should be asked, as it creates an imbalance. More transparency in legislation could lead to significant progress. The energy transition is overregulated, and privatization should also be considered. The regulatory framework should provide a level playing field and allow for experimentation. Of course, the safety aspects of a decentralized energy network require regulation, which is necessary for the harmonization of technical specifications, but laws should facilitate the energy transition and provide protection but not stifle innovation. Overall, the group agreed that the current regulatory framework hinders the transition to decentralized energy systems.

Conclusion

Decentralized energy systems and the use of tokenization in these systems have the potential to create more efficient and resilient energy markets. However, the complexity of current legal and regulatory frameworks presents obstacles to the swift adoption of these systems.

To pave the way for decentralized solutions, there is a need to reassess the relevance and necessity of these regulations. Additionally, local markets and sharing can provide benefits such as maximizing social benefit and decentralizing optimization, but the business case for these systems may require more work to establish.

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