This week’s Industry Current is written by Bernays ‘Buz’ Barclay, New York-based managing partner of law firm Rimon P.C. and senior adviser to boutique investment bank Marathon Capital.
The year 1994 was tumultuous for the U.S. power industry. Irrepressible forces of emerging competition were challenging utilities, new “non-utility generators”, regulators and legislators in ways that no one had anticipated, let alone experienced. There would be winners and losers. There was name-calling previously unheard in public forums of corporate conversation. Utility bankers were squirming to recover from their institutions’ recent balance sheet catharses, and the managing directors captaining the investment banks were coiling with long-repressed venom to deploy the capital markets to disintermediate the commercial bankers for a $20 billion annual prize. It was frankly exciting to be part of the struggle, especially for lawyers and financiers. But from that cauldron of commerce, one event that seemed very small at the time, has recently been bubbling up in my memory.
That was the year in which I chaired the second annual Power Industry Forum. That unusual conference series brought together ceos and other senior executives from across the nation’s traditional electric utility industry and the rapidly-coalescing independent power industry, to identify and argue about strategic issues they were all facing. The 1994 edition was when I first heard a presentation by a gentleman with a Ph.D. and a great smile, whom no one seemed to know, unless they happened to be from Palo Alto, which is greater now than it was then. He rose to the podium and spoke passionately, a clarion’s message that employed an unfamiliar term. He said “The Internet changes everything—everything!” He said it quite a few times. Most of the ceos in the audience listened politely, as I recall. They may have been grateful for what seemed an amusing break from the blood sport of berating each other’s business models and prospects before the regulatory officials and lenders in attendance. In any event I think it fair to say that they, (and to be fair, I), lacked any meaningful grasp of what the Internet would soon mean to our businesses, let alone our lives.
CAZELET'S 'KILLER APP'
Only 24 months later, in 1996, that same perspicacious and visionary entrepreneur Dr. Edward G. Cazalet founded Automated Power Exchange (APX). APX applied the Internet and a new business model to instantly squeeze huge costs out of buying and selling electricity, while for the first time making hour-ahead markets possible. He had not only foreseen, but brought to life, the 'next big thing'. It was the Internet’s first 'killer app' for the business of power.
Two decades after the startup of APX, 50 global thought leaders will assemble this month to identify and argue about the issues surrounding another new thing with the potential to transform the business and prospects of the power industry: the technology known as blockchain. On Sept. 13-14 in New York, the Blockchain World Congress will present an agenda focused on “use case” presentations. There are a lot of blockchain conferences around the world these days. Notably, this will be one of the first such conferences in the U.S. to devote attention to the potential application of blockchain technologies to energy and power.
WHAT IS BLOCKCHAIN?
Very much simplified, in its most widely-recognized application, blockchain technology is the distributed ledger underpinning for such digital value exchange propositions as Bitcoin, Ethereum, and other crypto-currencies. Deloitte has called it the “internet of value”. Developers worldwide are working to make it even more. Wall Street, the ‘Big Four’ accounting firms, IBM and other global consultants are investing and preparing their clients in the financial, insurance, and other transactive industries for the coming of structures, products and 'smart contracts' that will change not only the way they do business with each other, but the ways in which they are governed and regulated. Delaware is already taking a leadership role in amending its Corporations Code to accommodate blockchain business models, and New York is licensing crypto-currency exchanges.
The first area of interest among the financials has been the application of blockchain to settlement and payment transactions. Over 40 major banks are devoting significant time and resources, working together to develop and perfect settlements and payments through private and public blockchain platforms. They are not alone. Insurers, commodity suppliers and traders, very high net worth individuals, governments, and others with global footprints are looking for ways to transact through new protocols that offer trust-less transactions, lower cost, and locked-in accountability. Let us ask: if your bankers and accountants are doing it, why don’t you know about it?
Importantly for the power industry in the U.S., one of the most obvious early applications for financial application of the blockchain is expected to be in facilitating financial hedging transactions. Reduced availability of financial and commodity hedges has become a significant impediment to the financeability of merchant generation. If blockchain protocols could help open that door to alternative and strategic investors around the world, the impact could be very important to U.S. developers.
'BLOCKCHAIN CHANGES EVERYTHING'
Ironically, Wall Street heavyweight Blythe Masters, whose financial engineering led the development of the credit-default swap product, recently said that “the blockchain changes everything”. And Silicon Valley venture capitalist Marc Andreeson has opined that the “blockchain is the most important invention since the Internet”. At least for those whose fortunes are invested in the power industries, I believe Dr. Cazalet would, with a smile, advise us to pay close attention. There are more than a few similarities between the financial and transactional worlds that blockchain entrepreneurs are currently addressing, and those of the electricity business of 1994. With the strength of an idea whose time has come, who is to say how soon transformation may find us? The first blockchain “killer app” for power may not yet have been discovered, but be assured that there is a headlong effort underway to find it.
Applying a powerful new set of blockchain-based tools to the power grid and the businesses around it is bound to have exciting results. Even beyond the purely financial opportunities blockchain may offer, there are venture-backed entrepreneurs, young geniuses in Palo Alto and literally everywhere else, as well as the global accounting and consulting service providers to our industry, who are already thinking about the application of blockchain and its formative elements to greatly enhance the value of innovations we already have available. I personally like to imagine (and have had the pleasure of discussing with some young geniuses on both coasts) that it could be used to decimate transmission and distribution losses, harden the grid against cyber-attacks and multiply the value of distributed storage and electric vehicles, microgrids, demand response, smart meters and energy management. It could conceivably change how we balance and hedge intermittent renewable generation. It could help monetize valuable energy management in ways that would make retail customers want to stay hooked to the grid rather than leave it, and it could bring whole new business models to retail competition. And ceos across the grid dealing with aging employment rolls would agree that whatever has the potential to invigorate our great industry with youthful energy and ideas is worth serious consideration and probably investment, from every quarter. Blockchain certainly has that potential.
It has been fun and gratifying to scale this new information curve since my two technical power entrepreneur sons first hooked me on blockchain during a fishing trip a year ago. It is time for more of us to become conversant with it. Admittedly the potential of blockchain has not yet materialized into something from which our industry can finance, make money, and improve lives. Things move quickly, however. You may be a little late, but you are not behind. Yet.
For more information on the Infocast Blockchain World Congress, visit http://infocastinc.com/event/blockchain-world-congress.