As MENA countries ramp up development of renewable energy systems (RES), the Zero Emissions Traders Alliance (ZETA) remains focused on new energy markets.
We’re committed to markets, which are the living heart of all energy systems. They are needed for new energy systems to take hold and grow
Gulf countries have great potential to unlock the power of markets if they unite in regional markets for carbon and for new energy. So we’re looking at technical solutions to jumpstart regional trade.
Blockchain, specifically, might offer solutions that work in the unique conditions of the Gulf and broader MENA region. Approaching the problem cautiously, we’re homing in on pathways that might work.
Markets indispensable, technology changeable
Markets permit the price discovery required in all commodity sectors. But low carbon commodities are quite different from fossil commodities. They must encompass trade of two things: the new commodities themselves, and the ‘green’ attributes of those commodities. The latter are conveyed in certificates of various kinds; ‘green certificates’ that should trade separately from the physical commodities.
Our concern is to enable the growth of highly liquid international markets for these instruments, attracting investors and traders across the Gulf countries and the wider MENA region.
As we consider the kinds of trading and arbitrage that can occur in new energy commodities, and how to enable risk management to speed up the production of new energy, we’re studying technologies that can play a role.
Certainly many will look to blockchain solutions to ensure fair, low-cost trading and product integrity. But based upon our experience, we approach blockchain with caution. Its early applications are much too slow to serve energy trading. Yet innovations such as ‘stablecoin’ may prove important.
Let’s put the problem in context.
An environment of uncertainty
An advisor who’s been helpful to our thinking is Michael Merz, who spearheaded the software development of EFETnet (now known as Equias) providing peer-to-peer matching of transactions for European electricity and gas; later for carbon and other commodities. Most European OTC trades today are transacted on this widely used software.
Michael has wrestled with how to deploy blockchain in energy markets for more than a decade, launching “Enerchain” which was the only live blockchain project in European energy trading. His lessons learned are informing ZETA members on how the technology might be effectively deployed in the Gulf region.
Michael points out that the basic challenge is to facilitate trading of green certificates in a region with little history of it and no trusted international organisation like the EU to make rules. There is a lack of unified regulations, and there’s no single authority governing carbon trading, green certificates or anything else.
Instead in MENA, like in many regions, countries pursue separate national policies. Within the UAE itself, the seven Emirates are very autonomous in their policies and decision-making. RES certificates from Abu Dhabi are not tradable in Dubai for example.
There are certainly strong bonds of trust and good will among MENA countries. But there is also much uncertainty in a decentralised situation where countries’ plans and policies often diverge.
Can blockchain help? At a roundtable discussion last winter we covered the possibilities and pitfalls of blockchain. What emerged is the idea that blockchain can serve a very basic and important audit function.
If there is not an authority trusted by everyone in the region, then trust must be created artificially. This is where blockchain can make sense, as a kind of artificial trust anchor in an environment where trustworthy actors have different priorities and policies creating uncertainty.
Traders’ audit trail
On the technical level, blockchain offers a high degree of protection against various forms of market manipulation including double booking and related concerns. It could usefully serve as a shared transaction log providing an audit trail in the creation of green certificates.
For example, an asset owner might register his project and receive green certificates. The platform where he registers his certificates will write a transaction log record into a database. This database would be blockchain shared by all the registries.
So different registries might operate in different ways across the vast region, but the audit trail function is standardised, such that an auditor can see what’s happened and if double booking has occurred.
This basic blockchain service can be leveraged into the actual trading of green certificates. While separate registries may have a shared audit trail, they may also offer a trading platform. Or third parties may offer a trading function independent of the registries.
When a trade takes place, some certificates are transferred. The trading platform (whether independent or connected to one of the registries) sends a message to the registry where these certificates are stored.
Then a booking takes place which one-to-one reflects the transaction. This booking is again stored in the blockchain, which now serves as audit trail for the initial creation of certificates and for transfers between market participants.
A further step would occur when certificates are cancelled, deleted, transferred or retired by the registry. A retirement, for example the use of certificates to offset their owner’s emissions, could also be stored in the blockchain.
Michael suggests creating one regional registry for more market liquidity. The blockchain could be part of this registry; it doesn’t need to be an external audit trail. It would be there to ensure the integrity of the data, and the integrity of the bookings, so that the overall number of certificates remains in one-to-one relation to the actual assets.
Of course, we can be somewhat indifferent here because it depends on regulatory requirements, on what is possible and what makes sense in the region.
Which blockchain?
What’s needed is a neutral, decentralised system that enables widespread participation without need of a central regulator. It should be absolutely transparent, without any corporate or other organisation sitting in the center.
Such a decentralised platform should feature fast, high volume, low cost transactions. It should be censorship resistant, such that no single authority controls it. Indeed, it should be resistant to political or market manipulation by any industry player.
What can provide this?
One important entity working on solutions is the Kaspa Industrial Initiative (Kii), which advocates for a decentralised, ‘permissionless’ system with no central issuing authority. Kii suggests that such a system be governed by something called a ‘DAO’, a Decentralised Autonomous Organisation.
Kii is a non-profit, global project with a decentralised team helping its partners to think about how new energy trading can work in the new environment of digital assets (‘kaspa’ is an ancient Aramean word meaning silver).
Kii anticipates trillions of capital inflow into digital assets in the near future and believes much of this can flow into the energy and utilities sectors in a shift to decentralised green finance.
It’s looking at global interoperability for new trading platforms made highly secure and verifiable with blockchain.
Kii, like ZETA, wants to start in the Gulf region, with its reach to enormous markets in Asia and Africa. But new trading platforms should be interoperable according to standards that ZETA wants to create, because our commitment is to creating the best possible standards for trading.
To enable this, Kii is developing a ‘stablecoin’ called Gigawatt-coin (GWC), a zero-emission energy stablecoin. It will be a new financial instrument, a digital currency instrument separate from the US dollar or traditional currencies but backed by a basket of assets. These would be a combination of currencies, but also carbon credits and potentially even tokenised energy assets.
Potentially, this GWC could be used by the energy industry globally without being subject to any form of political manipulation. The whole idea is to bridge digital finance and energy markets using the GWC as a settlement instrument.
It should be noted that GWC is not a digital commodity with no issuer; it will require that a separate organisation be established to issue it. This will allow the value of the GWC to remain stable over very long periods of time in terms of years.
Such is the kind of system that we’re currently working on. ZETA will work with Kii and other partners to design a pilot project in the GCC region. And as always, our commitment will be to a regional approach, encompassing carbon markets and new energy commodities for the future.
(The author is CEO of UAE-based Zero Emissions Traders Alliance (ZETA). Any opinions expressed in this article are the author’s own)
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