In his guest contribution, Prof. Dr. Christof Weinhardt from the Karlsruhe Institute of Technology on the range of topics of tokenization and clarifies the question of what opportunities the field offers for the energy market.
Changing energy networks
In order to limit global warming caused by climate change, it is essential to decarbonise our energy supply. The associated global efforts to generate renewable energies are changing energy systems. Large coal and nuclear power plants are increasingly being replaced by wind and solar parks, but also to an ever greater extent by decentralized energy generation systems. With the help of biomass or private solar systems, electricity can be produced locally and, by electrifying the energy demand overall, e.g. through electric vehicles, it can also be used flexibly locally. If both systems are used correctly, decentralized energy systems can help to lower load peaks in the network and reduce costs for network expansion. Because currently renewable electricity in Germany is mainly generated by large wind farms in the north, but is mainly required in the industrially difficult south. This requires the construction of large north-south power lines, which on the one hand cost a lot of money and on the other hand are particularly unpopular with the population. So there is great potential here for the use of decentralized flexibilities. There are possible uses for tokenization in the energy network in particular in the processing of such decentralized markets and in the coordination of demand flexibilities and generation peaks.
Tokenization is the digital mapping of assets
Tokenization is a process in which assets are mapped using digital tokens. These tokens can be transferred, saved or changed on a blockchain and represent the ownership structure of the asset. The term tokenization is therefore not limited to a single market, such as the energy market. Both physical and non-physical assets can be tokenized. Well-known use cases for tokenization are the digital images of real estate and raw materials, patent and license rights, bonds, as well as works of art and other luxury goods.
Tokenization enables new markets, increases market efficiency and creates clear ownership structures
There are numerous advantages of tokenization. It makes it easier to trade assets that were previously difficult or impossible to trade, such as digital art or real-time certificates of renewable generation. Tokenization not only creates new markets, but also increases liquidity in previously illiquid markets. Investors also have the option of easily acquiring part of an indivisible asset. The direct transfer on the blockchain eliminates intermediaries, which increases market efficiency. It also makes asset trading safer. The blockchain is a public and unchangeable register in which the ownership structure of assets is clearly clarified and can be viewed at any time.
Tokenization enables secure processing of decentralized energy markets
Households can trade locally generated electricity with one another on local energy markets. This means that the participants are more closely involved in their own generation and the focus is on local added value. With the tokenization of such energy systems through blockchain technology, on the one hand, energy trading and, on the other hand, the control of local energy resources can be decentralized. The protection of privacy with regard to energy consumption data is the top priority here. The social closeness in local energy communities in particular ensures that most of the participants know each other personally. From a technical point of view, local energy initiatives in Germany, such as the Landau Microgrid Project (LAMP) of KIT, are able to implement blockchain technology. A basic understanding of the functionality and architecture of a blockchain application exists and has already been implemented in model tests. Tokenization is also possible from the perspective of the local market, in which the coordination of energy supply and demand is mediated.
Tokenization is also used in other peer-to-peer energy market projects with the help of blockchain technology to ensure a high level of process security and transparency. This includes the project, for example Pebbles the Allgäuer Überlandwerke or the one completed in 2020 District electricityProject in the Swiss canton of St. Gallen.
Tokenization as proof of origin for renewable electricity
By purchasing green electricity with a green electricity tariff, you can buy an electric vehicle in your household with a clear conscience, after all, the electricity you need is produced sustainably, i.e. in a climate-friendly manner. But is that even true? Can customers see where their electricity comes from? In principle, the proof of origin can be used to show that an electricity provider draws its supply from renewable sources, but ultimately all systems feed into the same network, regardless of whether the electricity produced is sustainable. An exact allocation of the amount of electricity that has flowed is therefore not possible. A blockchain-based certificate of origin could help here. In various pilot projects, for example, EnBW is investigating how the actual flow of electricity can be traced transparently and forgery-proof with such evidence. By using intelligent electricity meters, customers can see in real time which system their electricity actually comes from.
The potential for tokenization in the energy market has not yet been exhausted
In addition to the aforementioned possible uses of tokenization in the energy sector, other fields of application are also conceivable. One possibility is the documentation of subscription rights when sharing a solar system or a battery storage system. Tokenization also enables more flexible sharing of power consumption between multiple parties. Instead of having just one energy supplier, as has been the case up to now, households or industry could conclude contracts for proportionate supply or fixed purchase quantities with several energy suppliers. A more detailed description of these possibilities is provided in Whitepaper of EnBW. Another possible use of tokenization in the energy market is to expand the blockchain certificate of origin beyond sector boundaries. When generating hydrogen through electrolysis or operating heat pumps, tokenization enables holistic tracking of the path from the power source to end consumption.
Prof. Dr. Christof Weinhardt is a member of the scientific advisory board of Boerse Stuttgart Digital Ventures GmbH.