Using Blockchain Smart Contracts to Facilitate Renewable Electricity Generation

The transformation of the global energy system must be accelerated to reach the 2015 Paris Agreement's goal of limiting the rise in average global temperatures to far below 2°C, ideally 1.5°C, by the end of the century relative to pre-industrial levels. Renewable electricity supply can materially contribute to the worldwide emission reductions needed in the energy sector. Therefore, renewable electricity funding needs to be scaled up significantly and urgently to advance the energy transformation. However, the core revenue risks associated with these assets, including financing, volume, and price risks, make it challenging for them to attract finance at favorable rates and advantageous terms from traditionally risk-averse investors. A number of traditional techniques have been employed to hedge these risks but these have many limitations including operational inefficiencies, redundancy of and dependency on many intermediaries, amongst others. Decentralized applications, combining blockchain and smart contracts, have recently been mooted in the financial industry to address similar challenges but in different contexts. On this basis, this study, for the first time, explores the potential of using blockchain smart contracts to address the limitations of traditional renewable electricity financing and hedging applications. This thesis evolves from conceptualization to application, using the financing and operating risks of renewable generators as case studies. First, a financing framework for blockchain smart contracts is structured to determine if such novel arrangements outperform traditional instruments for asset finance. Next, new smart contract hedging arrangements are developed and analytically valued for blockchain deployment through a use case for minimizing volume risk. Thereafter, smart contract hedging instruments are deployed on a blockchain network using an arrangement for minimizing price risk. Results from these case studies indicate that blockchain smart contracts could be effective in overcoming the limitations and hedging the underlying risk exposures of existing arrangements but present their own risks that need to be better assessed and understood before they can become mainstream in the industry. These newly introduced threats motivate the final part of this work which is the development of a taxonomy of the risks and challenges of embracing blockchain smart contracts in facilitating renewable electricity transactions. Results here indicate that cooperation and partnerships between developers and researchers, renewable energy companies, and governments are required to better understand blockchain smart contract risks in the sector. Overall, compared to traditional arrangements that have been in existence for more than two decades, blockchain smart contracts are only burgeoning and have a chance to address their associated risks and enable the renewable energy sector to develop further.