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May 20, 2019

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Blockchain in Energy: A Practical Path to Standardization

Our previous post, Blockchain in Energy: Stakeholders, Solutions and the Path to Standardization, focused on the regulatory landscape in the energy industry and how it relates to standardization among blockchain technology in the renewable energy ecosystem. Alternatively, initiatives spearheaded by industry groups, for example the North American Energy Standards Board (NAESB), and the stakeholders working with those groups provide a clearer picture to the practical means to create standardization. Currently, NAESB is developing a standard digital representation of natural gas trade events using blockchain. Their efforts are limited to this particular use case, but the mechanism for developing standards lays out the path for standardization that is replicable for other segments of the energy industry, such as tracking and managing renewable energy certificates (RECs).

NAESB is an industry forum that brings together stakeholders in the wholesale and retail natural gas and electricity marketplaces to develop and promote standards within such marketplaces. NAESB is industry-driven, meaning that all interested parties can join NAESB and those interested parties can propose standards. To keep interests balanced, NAESB is organized by quadrants and those quadrants are further divided into segments. The quadrants are wholesale gas, wholesale electric, and retail markets, and each segment thereof includes the key categories of stakeholders. The Executive Committee, comprised of representatives from each segment, is responsible for standards development. Maintaining these operating procedures allows NAESB to ensure that the standards it develops align with the desires and best interests of the industries it serves.

To further the adoption of the standards that NAESB develops, the industry forum coordinates with governmental agencies. NAESB’s certificate of incorporation states, “The objects and purposes of NAESB are to propose and adopt voluntary standards and model business practices.” While NAESB does not compel those in the industry to adopt its standards, the final step in its standards development process is to file a report with the Federal Energy Regulatory Commission (FERC) informing FERC that it has adopted and ratified new standards, and the group cites working with industry regulators as a primary objective in its 2017-2019 Strategic Plan. Oftentimes, FERC incorporates in its regulations the business practice standards adopted by NAESB. On November 15, 2018, FERC incorporated by reference version 3.1 of the business practice standards adopted by the Wholesale Gas Quadrant (WGQ). In its Final Rule to do so, FERC explains that “in section 12(d) of the National Technology Transfer and Advancement Act of 1995 (NTT&AA),13 Congress affirmatively requires federal agencies to use technical standards developed by voluntary consensus standards organizations, like NAESB, as means to carry out policy objectives or activities determined by the agencies.”

According to NAESB’s 2019 Annual Plan for the Wholesale Gas Quadrant, a joint committee is developing “a standard digital representation of natural gas trade events, consistent with NAESB WGQ Standard No. 6.3.1 – NAESB Base Contract for Sale and Purchase of Natural Gas, in order to capitalize on smart contract and distributed ledger technologies.” This Base Contract for Sale and Purchase of Natural Gas is widely used in the industry and its latest revisions were included in version 3.1 of the business practice standards adopted by the WGQ. It is not yet clear exactly how the new standard will capitalize on distributed ledger technologies. NAESB is still drafting the language, which it will likely make public later in 2019. While the content of NAESB’s proposed standard is vital, the industry group’s interest in developing such a standard is also significant.

NAESB’s efforts are one of the first forays into standardizing the use of blockchain for the purchase and sale of energy. While these efforts focus on natural gas, the success of this effort would provide insight into how regulators, industry groups, and industry participants can collaborate to incorporate standardization of novel technologies, like blockchain. Such an effort in the natural gas industry provides an opportunity for those in the renewable energy space to replicate these efforts. NAESB has the credentials and weight within the industry to effect change on a large scale. The renewable energy industry has an opportunity to follow their lead in developing standards for the use of blockchain.

The nature of renewable energy sources is such that there is not as large of a focus on pre-generation trades of energy-producing sources, like natural gas, as there is with traditional fossil fuel energy generation (the sun, for example, is freely available to all). This differing nature means that blockchain applications in the renewable energy space tend to focus on post-generation services, and developers are creating blockchain-based services for a wide swath of operations within this stage. One such service is the tracking and management of RECs from generation to retirement. As it stands, tracking RECs is a burdensome and costly process due in large part to the transactional costs associated with purchasing certificates and verifying that the certificates have changed hands. Generally, the ultimate goal of developing standards is to increase productivity and efficiency by creating interoperability among different services and systems. Developing standards for the use of blockchain to track RECs through their lifecycle could expedite the uniform adoption and development of this service within the industry. The model for introducing standardization of blockchain uses in the natural gas industry set forth by the stakeholders engaged with NAESB provides a method to further the interests of those looking to promote the uniform adoption of blockchain-based services in the renewable energy industry.

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About this Author

Mark Higgins Attorney Mintz Levin
Associate

Mark focuses his practice on corporate law matters.

Before joining Mintz Levin, Mark was a law clerk to the Honorable Francis X. Spina at the Massachusetts Supreme Judicial Court. Prior to this, he was an assistant attorney general in the Division of Open Government in the Massachusetts Office of the Attorney General, where he enforced the state government’s transparency law as well as defended administrative decisions of state agencies on appeal. Mark has also served as a law clerk to the Honorable Joseph A. Grasso Jr. in the Massachusetts Appeals Court.

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