By Bryony Collins, Bloomberg New Energy Finance editorial team. This article first appeared on the Bloomberg Terminal and is available to BNEF clients on the web.
Digital ledgers, known as blockchains, will make trading in energy more liquid and enable developers to raise capital for projects by selling contracts for power at below-market rates, according to Nikolaj Martyniuk, chief executive of WePower.
The Lithuania-based company has developed a blockchain-based platform for trading renewable energy, and says that it expects, in November, to launch an auction for 300 megawatts of solar power in Spain. Auction participants will be able to buy solar power tokens on the platform for a discount of around 20 percent to market prices because the power will come directly from the producer without going through wholesale market mechanisms, Martyniuk told BNEF in an interview.
The platform will enable investors to essentially buy “the end-product of the plant in which otherwise they would invest equity”, he explained. Martyniuk’s argues that buying tokens for the future provision of energy on WePower’s blockchain could be an alternative type of investment and a more liquid one than conventional project equity. This is because the platform enables the trade of tokens at any point in time.
Solar power contracts can be sold and bought on the blockchain, or liquidated instead on the wholesale market, said Martyniuk. Large energy consumers could therefore use the WePower blockchain to match their consumption profile and hedge against changes in future energy prices, he added.
“We want our platform to enable the sale of energy at more or less the cost of its production,” said Martyniuk. Trading energy over blockchain is attractive to large energy consumers, such as corporates, because it provides transparency on how energy has been generated and when. For developers, it is a flexible way to sell energy to a variety of smaller parties and presents an alternative to more established power purchase agreements.
WePower intends to auction 1 gigawatt of solar power on its blockchain platform in its first year of operation, mostly for projects in Spain. The initial 300 megawatts of projects are expected to reach financial close in November, and to commission in mid-2019.
BNEF explores the growing market for blockchain in energy markets in the “Blockchain in Energy Markets” research note.
Q: How does WePower’s blockchain work – are you selling tokens for solar projects that aren’t yet built?
A: We’re selling smart energy contracts that will be executed once energy production has started. The energy will be accessible in six months, once project construction has finished, and will be sold at a discount because it comes directly from the producer.
Q: So the six 50MW projects are all solar PV projects in Spain currently under construction?
A: The projects are in the final stages of preparation. The developers are completing on the construction license, bank license and in November we expect them to reach financial close. We expect the projects to be operational in June / July 2019.
At this stage it’s more for people to understand how the auction process works. We have created explanations on the platform itself, and we are also interested in gathering feedback.
So they will get to know the projects, and will be able to participate once the auctions are launched in November.
Q: How will the projects be financed?
A: Most financing is coming from banks, and the equity from developer Conquista Solar, a Spanish energy company. Each project will sell up to 20 percent of energy on the platform. The rest is sold either partly covered by PPAs, or on the wholesale market through merchant power prices.
Q: So people are registering to participate in a future auction process?
A: Yes. If the person is able to consume energy in Spain, then he will be the point of energy consumption. And if he’s not a Spanish resident, then he’ll be able to invest and buy energy, and later sell it on the WePower platform itself, or just ask us to automatically execute the order and sell energy on the wholesale market.
Q: Will the energy be sold at a discount?
A: Current power prices in the Spanish market are around 55-60 euros ($64-$70) per megawatt-hour. The projects have a minimum price of 39 euros/MWh. So there’s a discount of around 20 percent, but it’s an auction so the price may go up. I would expect that the auction would start at the minimum price and there would be no huge bidding. Later on we might see a more active market where people join and the bidding would start.
Currently, we are working with developers looking for financing, who are able to sell energy at a very competitive price. We just announced a partnership with Green Enesys.
Q: Which consumers are interested?
A: Some consumers are definitely not willing, or are unable, to pre-pay for energy. Traders and investors in energy projects are willing to pre-pay for energy, because essentially they are buying the end-product of the plant in which otherwise they would invest equity. From an investment perspective that would be quite illiquid.
[By buying tokens] with WePower smart energy contracts, you are buying energy directly, which is very liquid and you are able to trade it at any point in time. Once the auction has finished, the secondary market is there on the platform itself and you are able to sell or buy additional energy contracts.
From the secondary market perspective, this is interesting to buyers who are not willing or are unable to pre-pay for energy due to internal electricity buying practices of the company. With this new solution, they can match their consumption profile and hedge their energy consumption.
Q: What will your blockchain platform enable?
A: We want our platform to enable the sale of energy at more or less the cost of its production. Renewable energy is one of the cheapest sources of energy production today and there is no fuel cost.
So if you’re able to buy energy at that price, you can always check what the historic price has been on the market for the last 12 to 15 years, and check against forward prices for energy, [to check that the price you are paying is a good one].
How to use the energy is your choice. You can either use it for yourself, or sell it later on.
Q: So there is opportunity to make a return on the difference between energy prices on the blockchain and the price of wholesale energy?
A: Exactly, blockchain is useful because you have the energy itself but then it is also a transfer of value as money.
A standard power purchase agreement is generally take or pay – so you buy the product and have to consume that energy. Blockchain enables you to take a large contract and divide it up to sell to smaller parties. It opens up more flexibility for everyone who participates, and you’re not tied to mandatory consumption, as you’re able to sell off your energy to any third party.
Q: For developers, selling blockchain contracts is a way of guaranteeing revenue?
A: Yes – it guarantees revenue once the transaction is closed, and for developers, it offers the opportunity not to be locked in a single contract for a long period of time but to have the flexibility to sell parts of the energy off.
Blockchain gives you transparency in being able to check where the energy comes from, from which project, when it was generated and how much CO2 was generated. This is important for large corporates that have renewable energy policies.
Q: Does the minimum price in the auction give developers certainty over revenue?
A: Yes – there is a minimum price and they fix the quantity of energy that they are willing to sell. Beyond that it depends on the market and the willingness of people to buy energy at a certain price.
Q: Have corporates shown interest?
A: Yes, we have a lot of interest from corporates. Our main targets today are Australia and Spain, but we receive interest from different parts of the world.
Q: The six projects of 50MW each are 30% of the company’s first year commitment to the platform at launch. Can we expect more?
A: For year one we have committed to release about 1GW of projects on the platform. Currently we unveiled 300MW and before the auction starts we will list more projects on the platform. For now, most of the projects will be in Spain.
Q: So customers in Spain can hedge their own electricity consumption by buying tokens, but buyers from Australia can also participate by buying the tokens and selling them on the platform?
A: Exactly. You can transfer the profits to your country, [either in the form of cash to your bank account, or as tradable tokens if WePower has a platform set up in your home country.] Stage two of the project will enable customers to swap their energy tokens from one country to another.
For example, in Lithuania investing in solar power doesn’t make so much sense compared to Spain, so I would be able to buy energy in Spain at a discount, sell it later on the wholesale power market in that country to make a return, and then transfer the cash to my Lithuanian bank account.