Deployment Of Blockchain Technology To Minimize Investment Risks In India’s Power Sector – Technology

The power sector in India has historically been plagued with
several challenges that have stymyied investment, innovation and
growth. One of the primary concerns voiced by a range of industry
stakeholders pertains to weak enforcement of contracts, which
creates financial and operational distress that often end up being
litigated. The Government of India has also recognized power
sector’s concerns around contract enforceability and attempted
to address these in the Draft Electricity (Amendment) Bill, 2020,
wherein a statutory authority known as the ‘Electricity
Contract Enforcement Authority’ is proposed to be set up with
the sole responsibility of enforcing power contracts.

Blockchain-based smart contracts are increasingly being seen as
a potential solution to help alleviate these concerns, especially
in light of them being self-executable, immutable, and transparent.
It is imperative to understand certain fundamentals of blockchain
technology before we delve into its applicability to the power
sector. Broadly speaking, blockchains are underpinned by
Distributed Ledger Technology (DLT), which is a
manner of record-keeping whereby information is recorded and stored
across multiple & identical data stores
(ledgers) and is possessed by each of the parties
to a transaction. Two core aspects of DLT are as follows:

Peer-to-peer based record: Traditionally,
record-keeping has been an activity undertaken by a
centralized/nodal entity where the risk associated is limited to a
single point of failure that could either emanate from genuine
technical difficulties or malicious attacks/malpractices such as
tampering. In contrast, DLT enables transactions and data to be
recorded, shared, and synchronized in a digital form across a
distributed network of various counterparties and participants,
making it more resistant to failure.

Removing possibility of ‘double spend’:
DLT ensures that the same asset/resource cannot be sent/promised to
multiple parties at the same time. Different transactions on the
same asset are proposed or initiated by different members
(nodes) to ensure correct sequencing of
transactions, which also prevents bad or improper transactions.

Blockchain is a type of DLT which employs cryptographic and
algorithmic methods to create and verify continuously growing,
append-only data structures (blocks) that take the
form of a chain (blockchain). New additions to the
blockchain can be initiated by nodes which creates a new block of
data and information of this new block is time-stamped and shared
across the entire network in an encrypted form. Thereafter, all
network participants would collectively determine the validity of
such block by a pre-determined algorithm-based validation method
(consensus mechanism). Once validated, the block
is added to the respective blockchain ledger of each participant¹. In this way, each network
member/stakeholder has the complete identical copy of the entire
ledger on a real-time basis. Further, these ‘blocks’ cannot
be retroactively changed, deleted or amended as a snapshot of each
block is contained in its subsequent block². Hence, the blockchain so created
becomes immutable and resistant to malicious attacks or
malpractices.

Smart contracts based on this technology will not rely on
external authorities such as intermediaries to enforce their terms,
and can be defined as self-executing contracts, wherein, the
pre-negotiated terms of the agreement are directly written into the
lines of the code. This codified agreement, once deployed, exists
across a distributed, decentralized blockchain network making it
immutable, thus eliminating any scope of human
error/intervention.

Interestingly, pilot programs employing the use of blockchain
technology are already being tested in India to develop
peer-to-peer solar power trading platforms. One such instance is
BSES Rajdhani Power and Power Ledger partnering with each other to
enable residents of a gated community with rooftop solar plants to
sell excess solar power to their neighbors, instead of letting it
spill into the grid. Another example is Uttar Pradesh Power
Corporation and Uttar Pradesh New & Renewable Energy
Development Agency partnering with Power Ledger to enable certain
government buildings and prosumers to carry out peer-to-peer
transactions for the trading of surplus solar rooftop power.
Notably, this appears to be India’s first blockchain-based
power venture to have received regulatory approval as it has been
approved by the Uttar Pradesh Electricity Regulatory Commission³.

While blockchain-based smart contracts are being experimented
for automation of peer-to-peer transactions in select microgrids,
its potential can also be explored for automating and enforcing
traditional power procurement arrangements between procuring
utilities and power generating companies. By way of an example, the
first step towards deploying a blockchain-based smart contract in
the power sector could be the pre-negotiated code which is proposed
to govern the transaction and is approved by the regulator. Once
the code is approved and deployed, the smart contract could
potentially automate the entire power procurement process by
undertaking activities such as scheduling, dispatch, sale and
payment for electricity on a real-time basis, which could
potentially reduce the volume of litigations on account of
outstanding payments. While this is a very basic example, it is
noteworthy that smart contracts based on private permissioned
blockchains are extremely scalable and can be coded in such a way
that it fits any foreseeable situation.

Blockchain technology is still at an initial phase of
development all over the world and the challenges which may crop
up, especially from a policy and regulatory perspective, are as yet
unknown. However, such smart contracts could indeed be a small step
towards reducing risk in India’s power sector.

Footnotes