USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE December 2020 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE December 2020 ABSTRACT Countries can achieve a successful energy transition and participate effectively in the climate market by applying available knowledge, good practices, and lessons learned. This paper provides an example of how blockchain technology contribute to these goals by linking energy and climate sectors, businesses, and customers. It assesses a pilot blockchain project undertaken in Chile to support distributed generation and carbon markets. Recommendations for scaling up innovative technologies to advance clean energy and climate change mitigation agendas are adduced. Rights and permissions This work is a product of World Bank staff developed with external contributions. 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For all other uses, please send an email to: pubrights@worldbank.org © 2020 Banco Internacional de Reconstrucción y Fomento / Banco Mundial 1818 H Street NW, Washington DC, 20433 Teléfono: 202-473-1000; Internet: www.worldbank.org Pag. 3 CONTENTS Pag. EXECUTIVE SUMMARY 6 THE ROLE OF EMERGING TECHNOLOGIES IN THE TRANSITION TOWARD LOW-CARBON ENERGY 6 CHILE’S PUBLIC SOLAR ROOFTOP PROGRAM 7 THE PURPOSE OF THIS PAPER 7 1. WHAT IS BLOCKCHAIN TECHNOLOGY? 8 2. THE ENERGY TRANSITION 11 Features of the Energy Transition 11 The Role of New Technologies in the Energy Transition 12 The potential Benefits of Blockchain in the Electricity Sector 12 Blockchain and Climate Markets 14 3. CHILE’S ENERGY AND CLIMATE POLICY 16 Climate Policy 16 Energy Policy 17 4. CHILE’S PUBLIC SOLAR ROOFTOP PROJECT AND ITS BLOCKCHAIN PILOT 20 Setting up the Pilot 21 Cost of the Project 24 5. RESULTS AND CONSIDERATIONS FOR SCALE-UP EMERGING FROM THE CHILE BLOCKCHAIN 25 PILOT IN THE ENERGY SECTOR Conclusion 30 References 31 BOXES Box 1 Examples of the use of blockchain in the energy sector 13 Box 2 The United Nations Framework Convention on Climate Change and the Paris Agreement 15 Box 3 Key policy innovations promoting renewable energy in Chile 18 FIGURES Figure 1 How blockchain works 9 ACKNOWLEDGMENTS Figure 2 Traditional centralized registry system and system using blockchain Figure 3 Number and kilowatts of distributed energy installations in Chile, 2016–19 9 19 Figure 4 PhiNet data loggers and public solar roofs 21 Figure 5 The GTIME blockchain 22 Figure 6 Data visualizer 23 This report was prepared by a core team comprised of Patricia Marcos, Florencia Sanchez Zunino, Susan Elaine David TABLES Carevic, Rachel Chi Kiu Mok and Rodrigo Pizarro. Table 1 Capital and variable costs of Chile’s Public Solar Roofs Program 24 The authors would like to express their sincere thanks and gratitude to Juan Pedro Searle (Ministry Energy Chile), ABBREVIATIONS Francisco Dall’Orso León (Ministry Energy Chile) and colleagues at Phineal for the support and guidance offered in the elaboration of this study, the timely feedback and the excellent collaboration throughout. CO2 carbon dioxide DER distributed energy resources The team would also like to thank World Bank colleagues including Marianne Fay , Virginia Brandon, Bjorn Philipp, ETS emission trading scheme Chandra Shekhar, Stephanie Gil, Gabriela Elizondo, Stela Mocan, Stephanie Rogers, Janina Franco and Francisco Winter IEA International Energy Agency IRENA International Renewable Energy Agency for the advice and guidance provided throughout the elaboration of this report. ITMO internationally transferred mitigation outcome MRV monitoring, reporting, and verification NDC Nationally Determined Contribution The team would finally like to thank Nannel Gacitúa, who designed the cover and the layout and typeset the report. PTSP Public Solar Roofs Program PV photovoltaic Pag. 4 Pag. 5 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE EXECUTIVE SUMMARY THE ROLE OF EMERGING TECHNOLOGIES IN THE TRANSITION TOWARD LOW-CARBON ENERGY Energy markets all over the world are undergoing facilitate trade among multiple entities and producers. CHILE’S PUBLIC SOLAR ROOFTOP PROGRAM models and accelerating the development of emerging a transformation as new energy and information It could be instrumental in managing the growing technologies. technologies are emerging and disrupting traditional complexity of the energy sector as well as data security The government of Chile, with support from the World market architectures. The emergence of blockchain- and resource ownership. The sector has been slow Bank and the Partnership for Market Readiness (PMR), The rest of this paper is organized as follows: based utility suppliers, intelligent technology in energy to recognize blockchain’s potential, however, and kickstarted the entry of disruptive technologies into the storage, prosumers, and electric vehicles are creating awareness across the industry is lacking. energy sector by pioneering the use of blockchain in • What Is Blockchain Technology? new opportunities for energy generation, distribution, the electricity sector.2 Its efforts build on the country’s • The Energy Transition and demand. At the same time, climate change and One of the uses that is gaining most traction is the Public Solar Rooftop Program for self-consumption in • Chile’s Energy and Climate Policy rapid urbanization are posing critical energy challenges trading of distributed energy resources (DER). Owners public buildings and create mitigation outcomes to be • Chile’s Public Solar Rooftop Pilot Project of multidimensional complexity. of small-scale generation sell excess generation directly recorded in the national registry of Chile’s energy sector • Results and Lessons Learned to other consumers. The flow of electricity is coded and reflected in the World Bank’s Climate Warehouse • Conclusions The energy transition will play an essential role in into the blockchain, and algorithms match buyers for Mitigation Outcomes. This warehouse will provide reducing the risks and impacts of climate change. To and sellers in real time based on preferences. Smart visibility on mitigation outcome transactions and will meet the Paris Agreement objective of “pursuing efforts contracts then execute automatically when electricity enable buyers and sellers to find and compare projects to limit the temperature increase to 1.5°C above pre- is delivered, triggering payment from buyer to seller. and the associated mitigation outcomes, demonstrating industrial levels,” annual energy-related carbon dioxide Removing financial transactions and the execution of a decentralized information technology approach to (CO2) emissions need to fall by more than 70 percent contractual commitments from central control brings a connect climate market systems.3 by 2050 (IRENA 2019b). The transition toward a low- new level of decentralization and transparency. carbon energy system will require the adoption of The Public Solar Rooftop Pilot has pushed innovation clean technologies, the digitalization of the sector, an Blockchain has the potential to play a significant role in within the Chilean Ministry of Energy. It comes at a very enabling policy environment, and the identification of the next generation of climate markets in the post–Paris relevant time, as it helps Chile achieve its strategy for synergies within sectors. Experiences by countries that Agreement era. All markets trading assets associated a low-emission and resilient energy sector, contribute have started this transition can inform other countries. with emissions reductions, whatever their structure or to the country’s NDC goals, and decarbonize the governance, require centralized registries. The result transition to a greener economy. The Ministry of Energy Climate markets and carbon pricing can contribute is a multitude of trading instruments operating within is committed to the transition toward a low-carbon to a low-carbon energy transition, because they offer closed technological systems following differing rules. economy and has played a leading role in Chile’s the opportunity to scale up the resources mobilized Emerging digital innovations (principally blockchain), climate change agenda. from the private sector, reduce the burden of meeting through the definition and design of new governance commitments under the Nationally Determined structures and operating models, could enable Contributions (NDCs), and increase global ambition a new architecture for climate markets based on to mitigate climate change. Article 6 of the Paris decentralization, transparency, and cost-effectiveness. Agreement recognizes that countries may engage in THE PURPOSE OF THIS PAPER cooperative approaches, including the use of bilateral Governments and businesses around the world agreements, to ensure mitigation outcomes that are taking steps to spur the adoption of emerging It provides a timely input for the continued negotiations contribute to individual NDCs. 1 technologies at scale. The question is no longer on international cooperation on carbon markets (Article whether emerging technologies work but how they can 6) and the possibility of developing climate markets Emerging technologies can help achieve a low-carbon be integrated into businesses and policies. across national jurisdictions and trade associations. energy transition while catalyzing the development of Although the Paris Agreement work program was climate markets. Technologies such as blockchain are agreed to at the United Nations Conference of the rapidly shaping the society of the future. Parties (COP) 24, in 2018 in Katowice, clarity is still lacking in many areas regarding how to operationalize Blockchain is emerging as a disruptor of the energy the next generation of climate markets under Article 6. sector, because it can manage complex contracts and Pilot activities like Chile’s public solar rooftop blockchain project could play a key role in testing new operating 1 Article 6 (which has not yet been finalized) recognizes that countries may use internationally transferred mitigation outcomes (ITMOs) toward their individual NDCs. ITMOs are mechanisms 2 For information on the Partnership for Market Readiness, see https://www.thepmr.org/. through which countries negotiate bilaterally for climate actions that have mitigation outcomes and can be transferred between cooperative parties. In effect, Article 6 recognizes the 3 For information on the Climate Warehouse for Mitigation Outcomes, see https://www.worldbank.org/en/programs/climate-warehouse. exchange of reductions in carbon emissions across jurisdictions. Pag. 6 Pag. 7 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE 1. WHAT IS BLOCKCHAIN TECHNOLOGY? Figure 1 A blockchain is a shared ledger of transactions between parties in a network, not controlled by a single central authority. How blockchain works One can think of a ledger like a record book: it records and stores all transactions between users in chronological order. Instead of one authority controlling this ledger (like a bank), an identical copy of the ledger is held by all users on the network, called nodes. [ Nodes ] —OECD Blockchain Primer (https://www.oecd.org/finance/OECD-Blockchain-Primer.pdf) Through a decentralized structure, blockchain Chile’s Public Solar Rooftop Pilot Project, described in DATA BLOCK 6 DATA BLOCK 7 DATA BLOCK 8 technology records information of interest to a given this paper, is a blockchain network in which computer network of participants by sequentially capturing and servers or nodes capture data from an electricity meter, registering blocks of data. In this way, it constructs a then store and hash this information in predetermined decentralized record-keeping system shared by all time blocks to a blockchain created for the project. members of the network. It is particularly useful for Data, eg electric generation, Data, eg electric generation, Data, eg electric generation, registry functions involving multiple entities or data Blockchain algorithms can also program transactions or CO2 emissions CO2 emissions CO2 emissions feeds that require secure and transparent transactions. trades across participants with an if-then code. These • Hash: 3457hfg64 • Hash: 7657grt64 • Hash: 9877dfft54 predetermined commands can be digitally encrypted • Hash block 5: 2157abc64 • Hash block 6: 3457hfg64 • Hash block 7: 7657grt64 Blockchain operates by using programming algorithms in a smart meter application or a “smart contract,” to time-stamp blocks of encrypted, mostly transactional thereby facilitating trade between consumers or data, and link them sequentially. New blocks are added producers. Potential transactions requiring the approval to the blockchain at timed intervals and “chained” of both parties can be built into the application, with together by inserting into the new block a “hash,” or all information pertaining to the transactions recorded digital fingerprint of the data in the previous block. securely in the blockchain structure. All nodes within The new block is then broadcast to all of the other the network will have the same transaction parameters computers, or “nodes,” that encompass the blockchain and host the results of the transaction. In this way, Because it can execute transactions without the need for trusted intermediaries and a centralized registry system, network, making the ledger nearly immutable—that blockchains ensure that the same transaction cannot blockchain is usually referred to as a peer-to-peer network (figure 2). Blockchain has the potential to significantly is, almost impossible to alter. As the ledger and the occur twice. These processes can be automated through reduce the transaction costs associated with trades or regulated contracts. number of computers or nodes that support the ledger blockchain applications. Blockchain not only registers grow, the security and immutability of the blockchain data in a secure and transparent way; it also, through network increases. applications that use smart contracts, can coordinate Figure 2 multiple trades across many participants in a network, in Blockchain technology is best known for its use as the effect solving the problem of market coordination. For Traditional centralized registry system and system using blockchain underpinning architecture for cryptocurrencies, such example, a prosumer (an end user who both consumes as bitcoin, to facilitate financial transactions.4 But there and produces electricity) can program the sale of excess are other important functions and reasons for the use electricity at a predetermined price, and a consumer Traditional centralized system System using blockchain of blockchain (including more secure storage/tracking can accept energy at this price under certain conditions. of data such as energy generation, CO2 emissions, If both agree to the trade, the exchange occurs. It is land registry information, supply chain transactions). then automatically registered in the shared ledger. This Agent 1 Agent 1 Blockchain delivers best in synergy with other emerging system eliminates the need for a trusted intermediary or technologies (such as advanced energy metering centralized registry. infrastructure). The business value of interconnects between new technologies to potentially combine with Figure 1 presents the blockchain process schematically, Central registry Agent 5 Agent 2 Agent 5 Agent 2 each other is underlined by their capability to address beginning with data block number 6. As electricity is (market overight) unmet market needs, create new products/services/ generated, data on emissions and solar radiation are solutions due to the uniqueness of their combined recorded through sensors and captured by the network potential, and drive unlikely players from diverse nodes every 15 minutes and put into a new block. The industries to work with each other. The World Economic data collected are hashed and saved to the block, along Forum has identified blockchain technology as one of with the hash of the previous block. In the figure, for Agent 4 Agent 3 Agent 4 Agent 3 the six megatrends underpinning the transition toward example, Data Block 7 has been issued hash number a digital and connected world (WEF 2015). 7657grt64; the block also contains the hash number of the previous Data Block 6 (3457hfg64). 4 Cryptocurrencies are digital means of payment and stores of wealth. The best known is bitcoin. Pag. 8 Pag. 9 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE The main advantage of blockchain is that it solves the coordination problem across multiple market Each structure has advantages and disadvantages. The decision about which blockchain structure to adopt will 2. THE ENERGY TRANSITION participants—without a centralized intermediary that depend on the specific objectives of the system to be In the last two centuries, the world experienced at least two major energy transitions—from biomass to coal, and records transactions. Thus, it can facilitate transparency, built, the nature of transactions, and the type of market then from coal to liquid fossil fuels (Kander, Malanima, and Warde 2013). There is now evidence that a new energy reduce the costs of each transaction, and reduce (Peter 2019) as well as cost considerations. transition—toward renewable sources, changes in the structure of the energy market, and the emergence of distributed information asymmetries in the markets in which it In summary, blockchains deliver capabilities that are energy resources (DERs) and prosumers—is underway. is applied. These benefits are especially relevant for complex transactions with multiple traders that require very attractive to most of the sectors/industries, i.e. data a tamper-proof system that supports energy trading reliability, accurate chain of custody tracking, improved and carbon markets. traceability, and product visibility. However, as is the case with any information system, blockchain faces a FEATURES OF THE ENERGY TRANSITION A blockchain system has a number of variable features— chief among them the openness of the platform (public complex and potentially controversial array of issues that need to be properly addressed during the design The growing share of renewables or private) and the level of permissions required to add of the blockchain information system. Among the most According to the International Energy Agency (IEA), the share of renewables in meeting global energy demand is information to the blockchain. A “public blockchain” important issues are: (i) quality of its data, (ii) regulation expected to reach 12.4 percent in 2023, a 20% expansion from 2018. Renewables will enjoy the fastest growth in the is an open network in which anyone can read, write and governance; and (iii) potential difficulties with electricity sector, providing almost 30 percent of power demand in 2023, up from 24 percent in 2017. During this (i.e., generate transactions for the ledger to record), or interoperability between blockchains and with existing period, renewables are projected to meet more than 70 percent of the global growth in electricity generation, led by participate (i.e., verify new blocks for addition to the systems. solar photovoltaic (PV) and followed by wind, hydropower, and bioenergy. Hydropower remains the largest renewable chain); whereas a “private blockchain” is an invitation- source, meeting 16 percent of global electricity demand by 2023, followed by wind (6 percent), solar PV (4 percent), only network governed by a single entity. Private and bioenergy (3 percent) (IEA 2019). blockchains allow organizations to employ distributed ledger technology without making data public. Similarly, The accelerated pace of renewable energy sources in the energy mix is the consequence of both concern over climate a “permissioned blockchain” needs prior approval change and the increased rate of technological innovation in the industry. According to the International Renewable before use, whereas a “permissionless blockchain” lets Energy Agency (IRENA), the installed costs of utility-scale solar PV projects fell by 74 percent between 2010 and 2017, anyone host a node and add data to the ledger. from $4,621 per kilowatt (Kw) to $1,210. Installation costs for newly commissioned onshore wind projects fell by 22 percent in the same period (from $1,913 per Kw to $1,497 (IRENA 2019a). The increase in storage capacity Storage capacity has also increased. According to IRENA, electricity storage will triple by 2030, and costs could fall by more than half (IRENA 2017). Associated technologies, such as electric cars, may increase demand for renewable energy sources but also contribute to the development of new energy solutions and the co-management of energy generation and demand. The advent of “prosumers” and distributed energy resources The growth of solar panel technology and the increased capacity for storage have created new opportunities for consumers. The availability of smart devices in the home has triggered demand for the continuous monitoring and control of electricity consumption, as consumers are starting to explore ways to optimize and manage their consumption. This development is increasing efficiency, opening an avenue for consumers as producers of energy generation (prosumers). Utilities’ business models have changed as well. One important innovation is DERs—small or medium-size installations connected to the distribution network or near the end user that can potentially provide services to the electric power system (European Commission 2015). Principally, but not exclusively, DERs generate solar PV power. Distributed solar PV energy is considered one of the most attractive renewable energy resources because of its economy, safety, low infrastructure costs, and low marginal cost. The distributed generation market is expected to exceed $573 billion by 2025 (Grandview Research 2018). DER solutions will play a key role as global urbanization advances. About 55 percent of the world’s population currently lives in urban areas. This figure is expected to rise to 68 percent by 2050 (UN DESA 2019). Urbanization will put enormous pressure on energy systems—but it can also facilitate innovative DER solutions. Pag. 10 Pag. 11 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE THE ROLE OF NEW TECHNOLOGIES IN THE ENERGY TRANSITION Box 1 New energy technologies for storage, DER, information technologies, the utilities of the future, and electromobility are Examples of the use of blockchain in the energy sector among the technologies driving the on-going energy transition. The digitalization of the energy sector, although slow, is especially relevant; it is already causing some large multinational energy companies to introduce major changes to their traditional modus operandi: Enerchain. • Corporate structures now include digital and data science organizational arms. Corporations are hiring In May 2017, the German software company Ponton launched the first platform to trade energy data scientists and cloud architects. products over the counter using blockchain. Participants in the gas and electricity generation markets can validate and certify transactions without the involvement of a third party, reducing transaction • Corporations are partnering with start-ups to learn more quickly and remain competitive—particularly on costs, increasing the efficiency of the value chain, and ensuring safe and fast transactions. In the initial data analytics, machine learning, and cloud architecture. (pilot) version, 39 German power and gas generators participated. In May 2019, the platform was officially launched, allowing its use throughout Europe. Participating companies include Iberdrola (a • Corporations are acquiring companies that operate on the retail side, such as aggregation platforms, the Spanish energy company), Total (a French oil company), RWE (a German energy company), and Enel Internet of Things (IoT), and machine learning platforms. (an Italian energy company). • Corporations are introducing digital academies and hubs to bring employees up to speed with ongoing The Energy Origin. disruptive trends. TEO is a web platform based on blockchain that improves the traceability of the renewable energy In the traditional energy market, energy users buy electricity from power utilities. In a smart grid, energy users are both consumed by revealing its origin in real time. Notably, the platform reveals to consumers whether they consumers and suppliers (prosumers) of energy, as surplus renewable energy generation can be traded with the utility are using renewable energy. Using blockchain, the system allows producers to connect to the platform and other users. The decentralized and secure nature of blockchain technology could bean enabler for smart grids and displays the corresponding certificates of authenticity. The platform is currently used by Engie, a and could accelerate the ongoing energy transition to decarbonized and smarter energy systems, addressing some of producer of renewable energy, and AirProducts, a manufacturer. TEO provides daily, tamper-proof the challenges the industry is facing. certification and tracks the amount of renewable energy injected into the network (by Engie) and the amount of electricity consumed at the industrial site (by AirProducts). The energy industry (particularly electricity) is increasingly becoming customer-centric—and customers have shown mounting interest in self-generation and in selling power to the grid. Customers are also demanding energy Greenchain. management services and more transparent energy data from their energy providers, thus increasing their ability to make decisions about their own energy use and about the providers they choose to supply them with energy services. ACCIONA Energía, a Spanish renewable energy company, launched the Greenchain blockchain New technologies will power the energy management services demanded by tomorrow’s energy customers. project to improve the traceability of renewable energy generated worldwide. It allows consumers to check, in real time, the origin of the renewable energy they are consuming. Five hydroelectric and wind This is the context in which blockchain technology must be understood. generators in Spain and four corporate clients in Portugal are piloting the project, which will then be scaled up to countries such as Mexico and Chile. THE POTENTIAL BENEFITS OF BLOCKCHAIN IN THE ELECTRICITY Powerledger. A software that allows for peer-to-peer energy trading from rooftop solar panels. It uses blockchain technology to empower households to trade their excess rooftop solar power with SECTOR their neighbours. The technology can also be used to trade renewable energy and environmental commodities. As blockchain is based on peer-to-peer (P2P) transactions, it can reduce the additional and significant regulatory Bitlumens. costs of intermediary institutions that regulate contracts. In this way, it provides a feasible means for direct electricity transactions between microgrids. In addition, blockchain can provide a publicly available charging infrastructure for BitLumens is building a decentralized, blockchain-based micro power-grid for the 1.2 billion people electric cars that tackles the challenge of limited range by enabling individuals to make their private charging stations without access to electricity and banking. It uses blockchain for transactions and payments through a available for public use for a fee. token. Villagers can buy tokens that are used for pay-as-you-go electricity and rent-to-own equipment. Tokens could also be used for remittance or crowdfunding purchases of electricity on behalf of Various companies have created blockchain applications in the sector (box 1). recipients. The company earns money through sales of equipment. Sun Exchange. The business model pertains to funding panel equipment. It purchases solar cells and lease them to schools and businesses in emerging markets. People from around the world can buy panels and lease them to recipients and receive dividends for doing so. Pag. 12 Pag. 13 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE BLOCKCHAIN AND CLIMATE MARKETS Box 2 Two conditions must be met for carbon markets to emerge. First, the international climate negotiation framework The United Nations Framework Convention on Climate Change must recognize that mitigation outcomes can be transferred across jurisdictions. Internationally transferred mitigation outcomes (ITMOs) refer to any carbon-based trades affecting Nationally Determined Contributions (NDCs). ITMOs and the Paris Agreement and market trades of carbon emissions are regulated under Article 6 of the Paris Agreement, the negotiation of which has not yet been finalized (box 2). According to one study, effective Article 6 trading rules could save up to $250 billion a year on climate action by 2030. 5 The centerpiece of the international climate governance regime is the UN Framework Convention on Climate Change (UNFCCC), adopted at the 1992 Rio Conference. The convention established a broad Second, the significant transaction costs associated with carbon markets must be reduced. In carbon markets, set of principles, including the principle of common but differentiated responsibilities. transaction costs are incurred in connection with information asymmetries, coordination, oversight of emissions trading, and the accounting structure through which trades are registered.6 All these institutional and governance On December 12, 2015, at the Conference of Parties (COP) 21 in Paris, parties to the UNFCCC structures, and therefore costs, could be significantly reduced if they are well-designed and agreed among all carbon reached a landmark agreement to combat climate change and accelerate and intensify the actions market parties and complemented by blockchain technology in decentralized carbon markets. and investments needed to achieve a sustainable low-carbon future. Builds on the UFCCC, the Paris Agreement established a new framework for global cooperation by all parties to the convention.a In In the absence of a structured market 7, governments must identify a national registry and accounting systems that that way, it unites all countries in a common cause to undertake ambitious efforts to combat climate are secure and can register emissions reductions and trades within a specific market. Maintaining such a registry is change and adapt to its effects. It also provides for enhanced support to help developing countries to extremely costly and involves massive coordination and information security issues, especially across jurisdictions and pursue those goals. legal systems. The difficulty of maintaining these registries is one of the principal problems hindering the emergence of integrated carbon markets across the world. 8 The basis of the Paris Agreement is a nonbinding bottom-up approach (in contrast to the top-down structure of the Kyoto Protocol). The agreement. It sets a goal of limiting average global warming to 2°C (and identifies the need to confine increases to 1.5°), which it seeks to achieve by requiring all parties to submit plans for their “nationally determined contributions” (NDCs)—country policy commitments that are unilaterally determined, voluntary, and nonbinding—and to make their NDCs increasingly ambitious over time. The agreement specifies the need for international financial support for developing countries with respect to both mitigation and adaptation. The accompanying COP Decision, also nonbinding, reiterates the goal of contributions of $100 billion for this purpose. The agreement also sets out the need for support for capacity building, technology transfer, and climate education. Market instruments and carbon pricing have been identified as relevant policy instruments for achieving the Paris Agreement targets. Article 6 of the Paris Agreement (which has not yet been negotiated is especially important, as it gives new life to carbon markets and cooperative mechanisms. . In 2019, under President Trump, the United States withdrew from the agreement. a 5 See https://www.ieta.org/resources/International_WG/Article6/CLPC_A6%20report_no%20crops.pdf 6 A few studies have been conducted on transaction costs in carbon markets, but they center on monitoring, reporting, and verification. Examples include Schleich and Betz (2004); Jaraite, Convery, and Di Maria (2010); Mundaca and others (2013); Joas and Flachsland (2014); and Kerr and Dusch (2015). Michaelowa and Stronzik (2002) review the transaction costs of implementing the Clean Development Mechanism, concluding that they may be considerable. Krey (2004) reaches the same conclusion for India. 7 Article 6 of the Paris Agreement recognizes the heterogeneity of approaches, providing a basis for countries to voluntarily cooperate with each other to deliver on their NDCs and raise ambition. This Article signals the use of carbon markets globally, allowing for decentralized bilateral cooperation approaches, including through internationally transferred mitigation outcomes. Emerging technologies has enabled increased data availability, systems automation, smart grid applications and data transfer, grid management, technological systems, and diverse governance rules. Information about mitigation outcomes is collected in a variety of repositories, including spreadsheets, databases reflecting pipeline activities, and registries at the country, regional, or institutional level. The new generation of climate markets is likely to develop as a network of decentralized markets, linking at regional, national and subnational levels, without centralized functions and processes. 8 It has been argued that one of the principal problems of the Clean Development Mechanism under the Kyoto Protocol were its transaction costs (see Chadwick 2006). Pag. 14 Pag. 15 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE 3. CHILE’S ENERGY AND CLIMATE POLICY A tax reform bill currently before Congress proposes a carbon emission offset scheme to compensate for the Major bottlenecks remain, such as integrating criteria, methodologies, institutions and objectives, and tax. If passed, it would be the first offset scheme in the dealing with the transaction costs of markets for carbon region with these characteristics. emissions. CLIMATE POLICY In recent years, various jurisdictions in the Western It is not clear how to fully operationalize a market-based Hemisphere have implemented carbon pricing to offset mechanism in a country like Chile, with its limited Chile has positioned itself as a global leader in international climate policy. It has committed to phase out coal by support efforts to mitigate climate change. Argentina, financial and human resources and small number of 2040 and move toward carbon neutrality by 2050. Because the energy sector is the main contributor to greenhouse Colombia, and Mexico, like Chile, have imposed taxable facilities, or more broadly across the region. gas emissions, accounting for 78 percent of total national emissions (MMA 2018), and electricity generation is the carbon taxes. In North America, California and Quebec A new registry system and monitoring, reporting, principal contributor in the energy sector, accounting for 53 percent of emissions (MMA 2018), efforts have focused have an integrated Emissions Trading System through and verification protocols will almost certainly be on promoting renewable energy sources, pursuing distributed energy alternatives, incentivizing energy efficiency, and the Western Climate Initiative, and U.S. states in the necessary.13 Of concern is how to achieve the necessary regulating emissions reductions. northeast have an integrated emissions trading scheme level of information security for operation of a tax for electricity generation companies known as RGGI with offsets or a broader carbon market. According Under the Paris Agreement, Chile committed to reduce plants represent 19 percent of the total installed (see https://www.carbonpricingleadership.org/). to one study, Chile lacks the capacity to achieve a the CO2 intensity of its GDP by 30 percent by 2030 capacity of coal-fired power plants, with a capacity of minimum level of cybersecurity; a carbon market or from its 2007 level. That translates to a reduction from 1,047 megawatt tons (MWt). the expectation is to cover Several continental initiatives seek to promote further offsetting scheme would require millions of dollars of 1.02 tCO2e/C$ (Chilean pesos) million in 2007 to 0.71 the shortfall with renewable energy generation. There links across Latin American jurisdictions and between investment.14 The transactions cost problem, and the tCO2e/C$ million in 2030.9 In addition, and subject to is no schedule yet for phasing out the remaining 20 North and South American jurisdictions. Among them required level of security, could be solved by adopting international funds, it has a conditional commitment plants. are efforts through the Pacific Alliance and a recent blockchain technology, as shown in chapter 4. to reduce the CO2 intensity of GDP to 35–45 percent initiative promoting a carbon market of the Americas. of the 2007 level. Chile has been among the first Chile has enormous potential in renewable energies, countries to update its NDC. The updated NDC has a particularly solar and wind energy generation. Some more ambitious mitigation goal, with an absolute goal estimations suggest that by 2030 up to 75 percent of ENERGY POLICY at 95 Mton by 2030, earlier peak of emissions in 2025, electric power generation in Chile could come from and lower carbon budget of 1110 Mton for the 11-year renewable sources (PSR and Moray Energy 2018). The Chile’s energy policy was built through a broad participatory process (ChileEnergía 2050). It establishes guidelines period10 , showing therefore its commitment to the energy transition—and the use of market instruments— and goals for the development of a reliable, sustainable, inclusive, and competitive energy sector (box 3). The policy international climate agenda. may be the key to accelerating Chile’s emissions is based on four pillars, each of which has specific goals and targets for 2035 and 2050.15 reduction targets. In April 2018, the Ministry of Energy launched the Energy Roadmap 2018–2022, which includes climate Chile is also exploring the development of a strategy change as a cross-cutting issue in the roadmap’s seven for participating in integrated carbon markets.11 It is a priority areas. In January 2020, the government sent to member of the Pacific Alliance (a trading association Congress the first national climate change law, legally made up of Chile, Colombia, Mexico, and Peru), binding Chile’s commitment to achieve carbon neutrality which has committed to move toward sustainable by 2050 and to phase out coal-fired generation by 2040. economic growth, and created a Green Growth Group Chile’s present energy grid includes 28 coal-fired power to discuss mechanisms to advance collaboration in plants, with an average age of 18 years, which emit 26 the development of carbon markets. It also belongs percent of all greenhouse gases while contributing just to the Carbon Pricing Leadership Coalition, a World 4 percent of the country’s power generation. Chile’s Bank–led coalition of countries and corporations low-emission energy strategy will make the country committed to carbon pricing, and supports the Carbon a pioneer in the fulfilment of international targets to Pricing of Americas initiative, an initiative of national reduce emissions. and subnational jurisdictions in the Americas aimed at 9 In addition, Chile has committed to the sustainable development and recovery of 100,000 hectares of forested land area. promoting dialogue on carbon pricing and integrated 10 https://www4.unfccc.int/sites/ndcstaging/PublishedDocuments/Chile%20First/Chile’s_NDC_2020_english.pdf To further advance the energy transition, the government carbon markets. 11 Integration of carbon markets has proved to be challenging due to their bottom-up nature. Climate markets worldwide have different scope and approaches, which add to the complexity has set a new, more ambitious target of generating 20 of market integration and trading across borders. Using the warehouse example, blockchain has the potential to facilitate communication between bottom-up markets, track assets percent of the country’s energy and 45 percent of all Chile implemented a carbon tax in 2017. The tax 12 across different systems and avoid double counting. electric generation from renewable sources by 2025. is significant because it is the only one in the region 12 The government of President Bachelet (2014–18) implemented a $5 per ton tax on CO2 emissions in 2017 (General Tax Reform Bill, Law Nº 20.780) on facilities in various sectors, To comply with its decarbonization commitment, Chile explicitly based on emissions, not carbon fuel content. including food-processing, refining, and electricity. In 2017, 96 facilities were taxed, raising $191 million in revenue. The CO2 tax covered about 40 percent of the country’s carbon emissions. will phase out eight coal plants through a voluntary It is therefore the most likely tax in the region to support progress toward more sophisticated market instruments. The Ministry of Energy, with support from the World Bank, is now developing such a system. 13 agreement with power generation companies. These 14 Achieving an acceptable level of security at the Ministry of the Environment and the Superintendency of the Environment, the agencies that regulate and operate the current tax, would require an investment of almost $17 million (over a three-year horizon) for the tax currently being implemented (Deloitte 2017). Moving toward an Emission Trading Scheme (ETS) or an offset mechanism would require even more resources for design and implementation, as well as a significant investment in information security to reach the level of security of banks. 15 The relevant goals for 2035 include the following: (a) “a fully bidirectional energy system with information technologies allowing both the production and management of energy at all levels”; (b) “at least 60 percent of renewable energy in the national electricity generation”; and (c) for 2050, “greenhouse gas emissions from the Chilean energy sector [that] are consistent with the limits defined by science at the level global and with the corresponding national reduction goal, promoting cost-effective mitigation measures.” Pag. 16 Pag. 17 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE Box 3 Key policy innovations promoting renewable energy in Chile The Renewable Energy Law (Law 20257). Energy transmission. The first important reform for the renewable energy sector was the approval of a Renewable Energy Law 20936 on electricity transmission, adopted in July 2016 aims to create a robust interconnected Law, which included a renewable portfolio standard. An RPS is a quota system that encourages transmission system that allows the unification of Chile’s power grid by connecting the Northern renewable energy generation by setting the proportion of electricity supply that must be produced Interconnected System with the Central Interconnected System. The interconnection of the systems from eligible renewable energy sources. Renewable energy technologies were first added to the will allow two medium-size markets to merge, forming a more competitive marketplace and allowing energy mix in Chile in 2008, with the approval of Law 20257, which aimed to support the generation of the energy generated from large solar potentials in the north to be distributed to the central and electricity from nonconventional renewable sources, such as biomass, small hydraulic energy (capacity southern part of the country. of less than 20 MW), geothermal energy, solar energy, wind power, and marine energy. This law was amended in 2013 (Law 20698, better known as Law 20/25), which states that renewable energy must Distributed energy. make up 20 percent of the energy mix in Chile by 2025. The key regulatory instruments for distributed energy are Law 19940 and Law 20571, adopted in Restructuring public auctions. March 2004 and March 2012, respectively. Law 19940 grants distribution projects below 9 MW the right to connect to the grid, creating a market for small energy generators (i.e., those with installed Chile improved the ability of generators of renewable energy to compete in energy auctions. Renewable capacity of up to 9MW).a energy projects without a power purchase agreement used to face significant obstacles obtaining funding from commercial banks. PPAs can be achieved in Chile through bilateral negotiations or Law 20571 authorizes a system of net billing of residential generators.b It regulates self-generation participation in power auctions—carried out by the National Energy Commission (CNE)—for regulated of energy based on nonconventional renewable energies and efficient cogeneration. The law gives consumers served by the distribution grid. users the right to sell their surplus directly to the electricity distributor at a regulated price through net billing. Since 2005, Law 20018 has required electricity distribution companies to contract their energy requirements by means of competitive nondiscriminatory auctions (including renewables). A submitted bid with the lowest price is awarded a long-term contract (typically, a PPA for the project). In 2014 three-time blocks were established in the bidding process, covering 11 pm–8 am, 8 am–6 pm, and 6–11 pm (peak demand). This modification in the structure of the auction scheme greatly favored renewable generators, which can offer power cheaply at the times of the day they produce it. In the latest and largest energy auction ever, the CNE had the goal of adding generation of 12,430 GWh/year, consisting of five-time blocks for 20 years starting in 2021. This auction covered 30 percent of Chile’s energy demand (Ministry of Energy 2016). Wind and solar PV projects were awarded about a. Small energy generators are regulated by D.S. N° 244 of the Ministry of Economy and D.S. N° 101 of the Ministry of Energy. 40 percent of the energy at the auctions. The efficient and competitive nature of auctions has reduced energy costs, encouraging further investment in the sector. Net billing pays the retail rate for customer-consumed generation and a below retail rate for exported generation. b. 16,000 Thanks to Chile’s generous endowment of renewable energy sources, the significant decline in installed capacity Figure 3 3,000 prices, and a series of innovative policy instruments (see box 3), the country has experienced a remarkable energy 14,000 transformation in the last few years. Installed capacity in nonconventional renewable energy sources (excluding large Number and kilowatts 2,500 12,000 hydroelectric) increased sharply, from practically zero in 2008 to 21 percent of all energy sold in 2018 (CNE 2018).16 Number of installations Total generation was 76.2 GWh in 2018, of which 34 GWh were renewable and 10.8 GWh were nonconventional of distributed energy 2,000 10,000 renewable, principally wind and solar (CNE 2018). Chile’s policies have been so successful that the government’s 8,000 installations in Chile, 1,500 kilowatts commitment of decarbonization by 2040 and carbon neutrality by 2050 will be met by renewable energy. 6,000 1,000 Chile has great potential in solar renewable energy but distributed solar PV generation has yet to take off (figure 3). 2016–19 4,000 One reason why is the high initial upfront investment (for solar panels, for example) of DER installations. The payback 500 2,000 period is estimated at 8–14 years, depending on the system installed (CNE 2019). To incentivize investment with such a long payback period, the government has implemented a series of subsidies to support the distributed energy market. 0 0 Source: Ministry of Energy of Chile. 2016 2017 2018 2019 16 These figures exclude large hydroelectric generation, which has about 23,315 MW of installed capacity (CNE 2018). Pag. 18 Pag. 19 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE 4. CHILE’S PUBLIC SOLAR ROOFTOP PROJECT AND ITS SETTING UP THE PILOT BLOCKCHAIN PILOT Preparation and implementation of the pilot involved four steps, as described below. In 2014, Chile’s Ministry of Energy created the Public Solar Roofs Program (known as PTSP, its Spanish acronym) to Step 1: Install and operationalize data loggers support the installation of PV systems in public buildings.17 The objectives of the $13 million program were to reduce the cost of operating public buildings, stimulate the market for PV solutions through the installation of solar panels, PTSP facilities record information on electricity generation data loggers that do not have a web-based network and generate free public access to information on the costs and conditions of PV projects aimed at self-consumption. connection.18 Independent inspection on the ground is therefore required to verify and certify these data, which is extremely costly. To address the problem, the pilot installed monitoring stations at 10 facilities to capture detailed real- The project explored the potential of a blockchain- when dealing with multiple trades across many small time information on energy generation to determine emissions reductions. 19 based monitoring, reporting, and verification system facilities. that validates and registers electricity generation PhiNet data loggers are data acquisition systems programmed in Linux, Nginx, and NodeJS that capture relevant certificates and, concomitantly, emissions reductions. The PTSP program ran from 2015 to 2019 and is information on energy generation and consumption, as well as other control variables, such as temperature and That exploration led to the implementation of a pilot expected to be renewed. During this period, it radiation, which can independently verify generation data. The PhiNet stations generate blocks of data (on electric blockchain project, the ultimate goal of which was the implemented 133 projects, with an investment of about generation, radiation, and so forth), which are uploaded onto the web every 15 minutes (figure 4). creation of an institutional infrastructure to foster the $5 million, reaching about 5 MW of installed capacity. growth of a carbon market capable of generating the funds required for initial investments in DER installations. The pilot was implemented in 10 public facilities Figure 4 It is worth clarifying that at the date of this report, Chile selected from the 133 photovoltaic (PV) installations does not have an emission trading scheme in place participating in the PTSP. Its objective was to test a PhiNet data loggers and public solar roofs through which emission reductions can be traded. Also, blockchain-based system of certification for renewable the DER market is still nascent and lack a competitive DERs and emissions reductions. The project installed retail market for trading of distribution resources. The hardware and developed a blockchain algorithm value added of the pilot was limited to testing existing designed especially for DER installations. The blockchain institutional structures and capacity for registration, platform provided information from February 19, 2019 measurement of data, verification and certification. to August 30, 2019. Generating distributed energy resources (DERs) based To validate data, the Public Solar Rooftop pilot initiative on renewable energy sources has several advantages: used a measurement system independent of the generation plant, which read multiple climatological • It provides a secure and stable source of electricity variables, including solar irradiation. The data was then generation at a low cost. compared with what was reported on the monitoring platform of the generation plant. If both gave similar • It reduces electricity losses and peak demand. results, it was assumed that the information was correct and then emissions reductions were estimated. • It has the potential of making a significant contribution to emissions reductions. Given the characteristics of the pilot, it was assumed that the plants displaced average energy from the grid, The scalability of distributed energy generation and the and not the last dispatched plant (that is, the PV self- possibility of generating an environmental asset in the generation was not enough to change the national form of emissions reductions require the emergence energy mix), so the reduction was calculated as the of a market to facilitate trade across DER installations, amount of energy generated by the emission factor of Source: Phineal 2019. sectors and, eventually, jurisdictions. One of the main the SEN (national electricity system). challenges in creating such a market is the need to validate and consolidate trade in energy generation Main attributes of the pilot are the following: (i) The PhiNet stations generate more data than is strictly necessary. Data on radiation and temperature, for example, are and emissions reductions among agents. Ensuring the document the provenance of distributed solar PV useful for verifying the efficiency of the PV installation, but they are not needed to estimate reductions in greenhouse integrity and cost-efficiency of trades requires sufficient generation; (ii) track emissions reductions achieved by gas emissions. They were collected because one of the objectives of the project was to verify whether the electricity market oversight to afford potential market participants of each unit of distributed PV generation system; and generation recorded on the registration platform currently operating the PTSP (Meteocontrol) was consistent with the certainty with respect to energy supply and emissions (iii) track ownership transfers between participants. PhiNet record and other control variables. reductions. The transaction costs involved in verifying emissions reductions can be extremely high, especially 17 The program received support from the World Bank–managed Partnership for Market Readiness (PMR program). 18 They are connected only to the central platform of Meteocontrol, the company that provides the centralized registration platform. 19 Servers were programmed in Linux, Nginx, and NodeJS. Monitoring stations were PhiNet with GHI and connected directly with data logger blue-log. Pag. 20 Pag. 21 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE Step 2: Program the blockchain structure Step 3: Operationalize the blockchain Phineal, the company that implemented the pilot project, developed a public, permissioned blockchain platform Nodes within the GTIME blockchain were installed in public and private buildings throughout Santiago de Chile designed specifically to manage energy installations.20 The platform, GTIME, identifies five data points relevant for to capture data from data loggers. Nodes were required to have an Internet connection and a connection to the energy management and the blockchain identifier. The blockchain platform records the following information: mainframe computer (both consuming less than 5W). After information is captured and stored on the blockchain, the information is made available to interested parties and the general public through a free-access website on which it is • Geolocation in Universal Transverse Mercator coordinates possible to visualize the generation of certified energy. • Time stamp using Coordinated Universal Time The GTIME blockchain is a dedicated (closed) blockchain network. Because Phineal is responsible for vetting each of the participating nodes (through a license that provides access to the network), only Phineal and government servers • Environmental data (radiation and ambient temperature) were allowed to participate. Phineal set up 10 dedicated servers to host the blockchain network. They were installed remotely and operated through the permissioned platform Phineal set up. The advantage of this approach is the ability • Electricity generation (obtained from the billing meter or data acquisition system) to control participation and utilize a low-cost, low-energy consensus mechanism.22 In this case, the only costs were for Phineal’s proprietary programming and the initial investment associated with setting up the data miners. • Identification of the PV facility • Media Access Control (MAC) address of the facility (unique identifier of the network device). Step 4: Construct a data visualizer Every 15 minutes, the GTIME data block pulls energy and environmental data with a specific ID and time stamp from the PhiNet installation equipment.21 It also provides a history of transactions—in this case, the energy injected into the The last step is to construct a data visualizer, a centralized registry of the data blocks open to the public—or, in this case, network (Soto and Hermosilla 2019). to all participants—that presents the data mined from and verified across all installations in the network (figure 6). All the captured data are visible on this platform, allowing individuals to verify that the information is consistent with the As the stations need 5 minutes to establish machine-to-machine communication over the Internet, every 20 minutes original data loggers from the PTSP registration system. the PhiNet sends the data and generates the GTIME block, which is “stamped” sequentially in the chain, as shown in figure 5. Figure 6 Figure 5 Data visualizer The GTIME blockchain Source: Soto and Hermosilla 2019. While this phase of the program did not register peer-to-peer transactions, trading could be programmed into a future iteration. This pilot captured only data on PV energy. Additional information could be included in the block for other Source: http://gtime.io:4040/. sources of energy, such as wind patterns, or different types of data could be recorded and transferred (for example, a hash of images associated with reforestation projects). 22 Data mining consumes energy. If the mining structure is public and open, an economic incentive must be put in place so that third-party servers can dedicate time and computer memory for mining. This is the approach taken by bitcoin, where mining activity is paid for with bitcoins for each puzzle solved or data block mined. In closed blockchains, the mining is 20 The blockchain architecture is hybrid. Phineal can authorize other servers to operate as miners, but it did not do so. For a blockchain architecture to be hybrid or open, an Internet carried out by dedicated servers. The advantage of this approach is that no additional payment for the actual mining is required; the only costs are the initial investment of acquiring and connection must be available. operating the servers and the energy cost of the mining. Which mining structure to adopt depends on the specific contractual arrangement the blockchain structure is trying to solve. In the case of this pilot, where the number of facilities was small and there was a role for government-regulated contracts, a hybrid blockchain was more appropriate, with Phineal giving 21 See https://gtime.io/. permission for carrying out the mining. Pag. 22 Pag. 23 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE COST OF THE PROJECT 5. RESULTS AND CONSIDERATIONS FOR SCALE-UP EMERGING FROM THE CHILE BLOCKCHAIN PILOT IN THE The total cost of the pilot project was about $100,000 (table 1). But this figure does not give a clear picture of the actual or future costs of making this type of project replicable and scalable, for several reasons: ENERGY SECTOR The pilot provides a real-world example of the application of blockchain to the energy sector that could be replicated • Phineal donated its proprietary programming, which it had already created. Blockchain architecture is not in other countries or sectors. It demonstrates that a blockchain platform can guarantee the integrity and transparency expensive, but it does require programmers. of the data and bring in participants from the public and private sectors. The project reduced emissions by about 800 tons of CO2 equivalent a year and saved about $250,000 in energy costs. • The project involved actions and processes that are not necessary for verification, such as the PhiNet monitoring installations. 23 The project addressed three problems: measurement, registration, and verification. • Energy, technology, and programming costs are all falling. • Phineal does not clearly separate its own sunk costs from its operating costs. The measurement problem. The project set up its own web-based measuring systems, the PhiNet stations. However, any web-based stations that Table 1 are standardized can be used. Distributed energy resource (DER) projects in Chile, including those participating in the PTSP, are not required to have a web-based generation metering system (smart meter). Yet web-based smart Capital and variable costs of Chile’s Public Solar Roofs Program meters could be made a requirement in future applications, in order to track energy generation efficiently and collect the corresponding emissions reduction data. DER systems not equipped with smart meters will need ground-based inspection with independent verifiers. Item Capital costs Variable costs Total cost 10 monitoring stations PhiNet station (hardware with data Installation and verification: $50,000 loggers): $4,000 $10,000 ($1,000 each) The registration problem. GTIME proprietary blockchain Establishing unique protocols for connecting new sources is necessary to register new facilities properly. The pilot has Blockchain installation algorithm: 0 (Phineal had already Programming: 0 0 demonstrated the ease of establishing protocols for connecting new sources. PV facilities are identified using their developed the software) Media Access Control (MAC) address. This is not a problem that blockchain resolves, but a good onboarding process can do the job. If the blockchain network encompasses many solar panels and sensors, then cloud technologies (such Blockchain management Human resources: $10,000 $10,000 as an IoT hub) can be used to identify and monitor these devices. Miners (10 miners) Purchase of 10 servers (20 others 5W of energy a day for three years: $5,500 were already on hand): $500 $500 Human resources: $10,000 $10,000 The verification problem. Visualizer Dedicated line Programming: $10,000 $10,000 Blockchain infrastructure ensures the data has not been tampered with, thus facilitating the verification and allowing the certification of offsets. As the project continues or expands, a hybrid or even open source nonproprietary blockchain Other administrative costs $14,500 could be explored as the basis of verification. The Ministry of Energy’s own Open Energy project may present a better alternative, as it is based on Ethereum, a well-known blockchain platform. Total $100,000 While the application of blockchain on climate markets remains nascent, lessons from the pilot, offered below, can Source: Phineal 2019; communication with Eduardo Soto, head of the Phineal project. help countries replicate and scale up similar projects to other sectors as they search for an integrated approach to energy transition and new carbon markets. No legal issues were assessed in the pilot. Similar projects in other sectors and countries could face legal hurdles. 23 The PhiNet monitoring stations are not strictly necessary in the case of energy distribution, because the energy produced can be captured from a smart meter. The PhiNet monitoring station captured data on solar radiation and temperature; such data are needed to determine the efficiency of panels, but they are not necessary for verifying energy produced. Pag. 24 Pag. 25 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE AN INTEGRATED APPROACH CAN HELP CREATE INCENTIVES FOR BLOCKCHAIN TECHNOLOGY CAN CREATE A SECURE SYSTEM A MORE DECENTRALIZED ENERGY SYSTEM ABLE TO ABSORB FOR COLLECTING AND TRANSFERRING ENERGY AND EMISSIONS MORE RENEWABLE ENERGY WHILE REDUCING TRANSACTION COSTS The project developed and generated a shared ledger system of relevant energy generation and emissions reduction data. The blockchain structure ensures that the transferred information from each facility is secure and provides a The pilot helped strengthen and develop the market for small-scale renewable energy generation, which has had platform that can support a wide range of applications, including the trading of emissions reductions. Backed by a difficulties taking off, by creating additional incentives through the potential sale of climate assets. The Ministry of specific monitoring, reporting, and verification (MRV) system, the blockchain structure allows the Ministry of Energy to Energy has achieved much in terms of fostering large-scale renewable energy and pricing carbon for large-scale better track DERs. thermal boilers and turbines, but distributed generation development is lagging. Despite the advent of net billing (see box 3), the regulatory environment and business model are not yet conducive to a strong push for distributed energy. Blockchain reduces the transaction costs of emissions trading by generating a viable and robust system that guarantees the integrity of climate asset information and makes those assets tradable. The project established a practical and The development of an MRV system to track production from renewables-based DERs, and the link to a potential climate cost-effective MRV system for energy mitigation actions tailored to the needs of Chile’s energy sector, which could be registry, could help create additional incentives for small-scale renewable energy generators and the development expanded to include small-scale power producers. of start-ups as business models. It has helped move the DER agenda forward in an innovative way by using new technologies and linking it to potential future climate markets. Chile currently imposes a carbon tax of $5 per metric ton. Congress has recently approved a reform that allows facilities that want to reduce their carbon tax liability to do so by offsetting their emissions by paying a third party to reduce their The project also helped establish the conditions for a unique combination of private financing incentives for DERs with emissions equivalent. Although technically possible, the high transaction costs of developing and verifying emissions an innovative and well-designed public program and an MRV system, providing a practical application of the approach reductions makes it highly unlikely that tax-liable facilities could offset emissions with the emissions reductions of small known as maximizing finance for development. facilities, such as DER generators. However, a blockchain architecture such as the one proposed by this pilot could be the basis for a broad market in emissions offsets. A blockchain-based trading system, if well designed, could be both economically and technically viable. This blockchain-based trading system would allow facilities affected by the carbon tax to buy offsets from DER facilities, helping these facilities to meet the upfront costs of PV installations and credit subsequent emissions reductions to the facility, enabling it to reduce its carbon taxes. The blockchain structure is well suited as a supportive infrastructure for this scenario. BLOCKCHAIN TECHNOLOGY ACTS AS AN ENABLER OF A WELL- DESIGNED BUSINESS MODEL Benefits of using a blockchain architecture are numerous but scalability and replicability of this and similar pilots remain at challenge. The reason behind it lays less on the digital readiness of public or private entities, and more on THE PILOT HELPED BUILD RELATIONSHIPS WITH GLOBAL the lack of functional business models. For instance, in the energy sector, implementation of smart meters (needed to be able to track transactions of DERs) has been a controversial issue in several countries because of the large up-front INITIATIVES capital investments required for full-scale implementation throughout a country (these extra costs are often transfer to end users through electricity bills). However, a well-designed business model that links DERs transactions with the The project strengthened collaboration between the World Bank and the Ministry of Energy on future climate markets benefits of carbon trading could make the deployment of expensive smart meters profitable due to both selling of under the Paris Agreement, according to the joint statement released April 11, 2019. The collaboration focuses on the energy and climate assets. Therefore, blockchain technology acts as an enabler of a well-structured business model. development of mitigation outcomes, the World Bank Climate warehouse, and the piloting of blockchain technology. Going forward it is crucial to think through the operational framework by linking sectors (i.e. bringing climate revenues It provides an important example of supporting trade in climate assets registered through blockchain that could to the energy sector, which generates approximately 70% of the greenhouse gas emissions worldwide) and identifying eventually build a Pacific Alliance Emissions Trading Scheme for Latin America and the Caribbean, which could serve as technology convergence (i.e. blockchain and smart metering). a model for middle-income countries in other countries. The project also provided a replicable innovative framework for generating climate assets and developing efficient market-based mechanisms capable of mobilizing additional finance to drive DER activities.   Pag. 26 Pag. 27 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE INTEGRATED ENERGY POLICY FRAMEWORKS Cross jurisdiction interconnections. The pilot is implemented in a nascent market segment -distributed energy resources- that is set to grow substantially Given the transparent and decentralized nature of blockchain, the technology could support the development of cross- in the future (most notably in middle-income countries such as Chile). A combination of energy/digital technologies country linkage. One of the main potentials of blockchain is its ability to connect decentralized systems and help securely in fact will amplify the scope of DER markets. The “distributed” nature of this markets implies multiple transactions track assets across different systems and avoid double counting. This could provide critical benefits for cross-country (between the prosumer/aggregator and the grid, and among consumers, or peer-to-peer). As of the date of this note, linkages since connecting diverse market mechanisms through a decentralized, blockchain-based approach could Chile has a net billing policy that rewards surplus energy injected to the grid at a fixed or regulated tariff. Under these potentially be simpler and more cost-effective, in comparison to a centralized approach. Blockchain technology could conditions prosumers have no incentive to add battery energy storage (solar-plus-storage), since storing/shifting load allow instant comparison of reliable data across national and sub-national jurisdictions. The experience and lessons is not rewarded by a peak tariff (for example, consuming stored solar energy during peak time would reduce the learned by the Government of Chile through this program could serve as a starting point for regional coordination and electricity bill for the prosumers, or storing solar energy for injections during peak time could be rewarded by a higher collaborative testing in future years. Other countries in Latin America such as Peru, Colombia, and México are already tariff). If peak tariff were allowed in Chile, solar-plus-storage would have a more strategic impact and higher benefit (i.e. implementing carbon pricing instruments and could potentially benefit of the application of blockchain technology. more renewable energy and less emissions reductions) on the grid. Thus, in the future, recording and verifying these more complex transactions with blockchain will be even more important (or justifiable), since the potential for system benefits (deferring generation and network expansion and displacing fossil-fuel peakers) would be -in principle- substantially higher. CONSIDERATIONS FOR SCALE-UP Chile’s experience can provide relevant lessons to other countries exploring the using of blockchain to support climate markets. Blockchain could also contribute to the decarbonization goals and climate markets strategy of the country. However, there are some key considerations that the government of Chile could assess further to scale up the use of blockchain on climate and energy markets. Additional testing. The Public Solar Rooftop program provided relevant insight on the potential of blockchain for the energy sector, but further testing is needed to understand the full potential of the technology and assess the challenges. The potential to support the country’s climate strategy will depend on different criteria and the decision to implement a blockchain approach should be based on a thorough evaluation of different factors, such as: • Cost benefit analysis: further analysis is needed to understand the benefits of blockchain application compared to different technologies, and what are the costs associated to running and maintaining a blockchain-based system. • Governance: the decentralized nature of blockchain requires a good understanding of the governance options and of the stakeholders that should be involved in the process. • Regulatory framework: given the rapidly evolving landscape of blockchain technology, it will be important to consider how to comply with rules related to the data managed on the blockchain system. • Interconnection with climate policy instrument and tools: Additional testing should evaluate the feasibility of interconnection with national systems and tools, and how the connection would work given system requirements such as documentation, support tools, and permissions. 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Joint Statement ideas.repec.org/p/mtu/wpaper/14_09.html. by the World Bank and Chile’s Ministry of Energy announcing a collaboration on future climate markets under Article 6 of the Paris Agreement Pag. 30 Pag. 31 USING BLOCKCHAIN TO SUPPORT THE ENERGY TRANSITION AND CLIMATE MARKETS RESULTS AND LESSONS FROM A PILOT PROJECT IN CHILE December 2020