Tokenisation

How Blockchain Revolutionises Energy Ownership

February 19, 2024

As the global need for environmentally conscious energy intensifies, tokenisation emerges as a groundbreaking strategy to democratise energy ownership. Amidst the growing consensus on the need for a shift to renewable resources, the challenge of accessibility and affordability persists. By leveraging blockchain technology to fractionalise ownership of renewable energy assets, tokenisation offers an inclusive pathway for individuals and communities to invest in and benefit from sustainable energy sources. This innovative approach not only aims to lower the barriers to entry in the renewable energy market but also foster a more distributed and participatory energy landscape.

Democratising energy: The role of tokenisation in ownership

The shift towards sustainable energy is a global priority, underscored by initiatives like the Paris Agreement, especially within Europe. This movement faces the challenge of perceived high costs and barriers to entry in the renewable energy sector. However, recent commercialisation of energy storage technologies shows significant cost reductions in wind, solar power, and grid stability over the past few years. This cost reduction has widened access to renewable energy, allowing a broader spectrum of individuals to benefit from these technologies.

How tokenisation democratises energy ownership 

Tokenisation plays a pivotal role in further democratising energy ownership. For individuals without direct access to physical assets, such as a roof for solar panels, tokenisation offers a novel solution. Through crypto anchors and property rights encapsulated within tokens, individuals can own a share of an energy asset. This approach not only allows for the ownership of the physical asset but also enables individuals to own carbon credits, kilowatt hours, and even data rights associated with the energy asset.

One such initiative is Sunified –  a solar technology company creating critical infrastructure to facilitate yield farming on solar infrastructure. Yield farming is the process of staking or lending cryptocurrency assets within a DeFi protocol’s liquidity pool to receive rewards, often in the form of the protocol’s governance tokens. Liquidity providers are then compensated with an annual percentage yield (APY) in real-time for their contributions as a result. The purpose behind yield farming is to promote the platform’s utilisation and compensate the community for adding liquidity, crucial for the ecosystem’s vitality and growth. Sunified’s initiative also includes storage infrastructure integration into electric vehicles (EVs) and other parts of the energy ecosystem. 

As energy grids undergo a gradual transformation over the next decade, tokenisation offers immense opportunities to introduce new business and ownership models through blockchain and sound crypto infrastructure architectures. This transition presents a unique chance to reconstruct the energy ecosystem, making sustainable energy ownership more accessible and flexible for a wider audience.

Fractional ownership of solar power 

Fractional ownership in the context of solar power introduces an innovative approach to investing in renewable energy. This concept allows individuals to collectively invest in solar projects, such as solar parks or community solar gardens, through a blend of equity and debt financing. The essence of fractional ownership lies in the tokenisation of solar infrastructure, breaking down the investment into manageable units—whether in the form of €100 blocks or based on the capacity, such as 100 Watt blocks of a solar panel.

A group of experts would initially determine how to capitalise on a solar project, deciding on the mix of equity and debt to make the project investment-ready. This capital structure can then be tokenised, offering participation rights to investors. Tokenisation carves up the asset into fractional pieces, making it possible for a wider audience to invest in solar energy projects.

It is crucial to differentiate between owning a part of the solar park itself and having rights to the energy produced by it. While you might not fractionalise the energy output directly, fractionalising the means of production — i.e., the solar panels and infrastructure — offers a tangible way to invest in solar energy. Fractional ownership and tokenisation democratises access to renewable energy investments, enabling more people to contribute to and benefit from sustainable energy solutions.

How should a real-world asset, such as energy, be put on the blockchain? 

Placing a real-world asset like energy onto a blockchain involves a multifaceted approach that bridges the physical and digital worlds. With a particular focus on renewable energy sources like solar power, the process starts by establishing a tangible connection or “hook” between the physical asset and its digital representation on the blockchain. This involves integrating a sensor directly into the asset during the manufacturing process, such as embedding it within a solar panel at the Original Equipment Manufacturer’s (OEM) factory. This sensor plays a crucial role in anchoring the asset across three realms: the physical world, the digital world, and the crypto realm.

The sensor enables tracking of the solar panel’s lifecycle from its inception, including its initial performance and the carbon footprint incurred throughout its supply chain journey. By activating the panel in the field, it is possible to account for its entire lifecycle, including production, deployment, and operational carbon emissions. This comprehensive approach ensures that the asset is not only represented accurately on the blockchain but also that its environmental impact is meticulously accounted for.

This method transcends traditional reliance on third-party verification or trust anchors, reducing the need for intermediaries. Instead, it offers a direct and trustworthy linkage between the real-world asset and its blockchain counterpart. This direct connection is essential for leveraging blockchain’s capabilities to support decentralised and distributed energy systems, which are increasingly becoming bidirectional.  Unlike the traditional centralised energy distribution model, where power flows from a central hub to consumers, modern energy grids are evolving to support energy flow in both directions. This shift necessitates new measurement infrastructure to accommodate and accurately represent these changes on the blockchain.

Navigating challenges in energy tokenisation

The journey of tokenising energy assets is fraught with multifaceted challenges, significantly influenced by regulatory uncertainties, security concerns, data privacy issues, market volatility, and a general lack of understanding and readiness within the industry. A pivotal aspect of navigating these waters involves identifying the nature of energy tokens for regulators—be it as utility, payment, or governance tokens—or even advocating for a multi-use token that transcends traditional categorisations.

Regulatory Hurdles

Discourse within the digital asset community highlights a need for regulatory frameworks around energy tokens that must be clearly defined. This confusion necessitates a rigorous educational effort towards regulators, to clarify the distinctions and functionalities of various token types, including utility, energy, asset, and governance tokens. Without clear regulatory guidance, projects are compelled to seek jurisdictions with more favourable legal frameworks. The UK is a regulatory example of a more defined ecosystem for property rights, energy governance, and tokenisation of real-world assets. The only other option would be to work within regulatory sandboxes and project-specific frameworks to advance tokenisation initiatives without overstepping uncertain legal boundaries.

Moreover, the push towards standardising practices across different regulatory environments presents another layer of complexity. The UK has made significant strides in establishing clear guidelines through bodies like The Financial Conduct Authority (FCA). Other jurisdictions are still in the budding stages of adapting their regulations to accommodate the novel demands of tokenised energy systems. In addition to regulatory hurdles, the practicalities of offering energy tokens without categorising them as equity to facilitate easier trading, and the fundraising challenges for scaling projects across multiple locations, are critical. 

Communication

The ability to articulate the concept and clear implications of tokenising energy resources, such as solar panels, is crucial for market acceptance and regulatory compliance. This task extends beyond mere product explanation; it encompasses clear dialogue with lawmakers, consumer protection bodies, and entities concerned with data privacy. Simplifying complex technological underpinnings for a diverse audience, from regulators to the layperson at the bus stop, is essential. Failure to do so risks future operational nightmares, underscoring the importance of both education and transparency in the tokenisation ecosystem. Simplification without sacrificing essential information ensures that investors, users, and stakeholders, who will journey with the initiative for years to come, fully comprehend its value and operation, making the technology’s intricate background less daunting and more accessible.

Where to begin: energy tokenisation

Embarking on the journey of energy tokenisation requires a foundational understanding of the token’s purpose, its intended holders, and the value it offers. Before diving into the legal and technical specifics of token types, it is essential to address these fundamental questions. 

This approach does not necessitate a one-size-fits-all solution. For instance, investors interested in direct engagement with energy projects can opt for utility tokens, whereas those looking for a more traditional investment route might consider security tokens tied to assets like solar parks. This flexibility allows projects to cater to diverse investor preferences, enhancing accessibility and interaction. 

Highlighting the significance of inclusivity and accountability in energy trading, an initiative such as the Amelander Energy Cooperative demonstrates the potential for democratising energy markets. Such a project demonstrates the possibility for transparent, traceable systems that ensure accountability across all levels of interaction—from investors to consumers, and from producers to the overarching financial ecosystem. Achieving this level of integration and transparency is a meticulous process to harmonise understanding and communication across various stakeholders. 

Conclusion

Tokenisation within the energy sector signifies a significant stride toward democratising access to renewable resources and fostering sustainable practices. By bridging the gap between the physical and digital realms, tokenisation introduces a new paradigm where renewable energy assets, like solar power, become attainable and manageable for a wider audience. This process not only democratises access to sustainable energy solutions but also addresses the pressing need for energy independence, resilience, and environmental preservation. As we navigate the complexities of regulatory landscapes and technological challenges, the ultimate goal remains clear: to create an energy ecosystem that is inclusive, transparent, and aligned with the principles of environmental sustainability. Through collaborative efforts, innovative approaches, and community engagement, tokenisation has the potential to reshape our energy future, making sustainable living a reality for all.

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