BLOCKCHAIN: AN ENABLER FOR POWER MARKET OPERATIONS EXPLORING POTENTIAL USES OF DISTRIBUTED LEDGER TECHNOLOGY IN THE EVOLVING GEORGIAN POWER MARKET
USAID GOVERNING FOR GROWTH (G4G) IN GEORGIA
30 May 2019 This publication was produced for review by the United States Agency for International Development. It was prepared by Deloitte Consulting LLP. The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.
BLOCKCHAIN: AN ENABLER FOR POWER MARKET OPERATIONS EXPLORING POTENTIAL USES OF DISTRIBUTED LEDGER TECHNOLOGY IN THE EVOLVING GEORGIAN POWER MARKET
USAID GOVERNING FOR GROWTH (G4G) IN GEORGIA CONTRACT NUMBER: AID-114-C-14-00007 DELOITTE CONSULTING LLP USAID | GEORGIA USAID CONTRACTING OFFICER’S REPRESENTATIVE: PHILLIP GREENE AUTHOR(S): SRI SEKAR, JAMES CALLIHAN, AVTANDILI TODUA ACTIVITY AREA: 4420 LANGUAGE: ENGLISH 30 MAY 2019
DISCLAIMER: This publication was produced for review by the United States Agency for International Development. It was prepared by Deloitte Consulting LLP. The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.
USAID | GOVERNING FOR GROWTH (G4G) IN GEORGIA BLOCKCHAIN: AN ENABLER FOR POWER MARKET OPERATIONS i
DATA
Reviewed by: Giorgi Giorgobiani, Andrea Lora
Project Component: Energy Trade Policy Improvement Component
Practice Area: Electricity Trading Mechanism (ETM)
Key Words: Blockchain, Clearing, Settlement
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BLOCKCHAIN: AN ENABLER FOR POWER MARKET OPERATIONS EXPLORING POTENTIAL USES OF DISTRIBUTED LEDGER TECHNOLOGY IN THE EVOLVING GEORGIAN POWER MARKET
ACRONYMS
BRP Balancing Responsible Party DAM Day-Ahead Market DEA Data Exchange Agency EBP European Blockchain Partnership EBSI European Blockchain Services Infrastructure ECC European Commodity Clearing EEA European Economic Area EEC European Energy Community eIDAS Electronic Identification and Trust Services (eIDAS) Regulation ERP Enterprise Resource Planning ESCO Electricity System Commercial Operator EU European Union EUR Euro GDPR General Data Protection Regulation GNERC The Georgian National Energy and Water Supply Regulatory Commission GoG Government of Georgia GREDA Georgian Renewable Energy Development Association GSE Georgian State Electrosystem G4G Governing for Growth in Georgia ICO Initial Coin Offering ICT Information, Communication, and Technology INATBA International Association for Trusted Blockchain Applications IoT Internet of Things IPFS Interplanetary File System IT Information Technology KYC Know Your Customer MO Market Operator MoESD Ministry of Economy and Sustainable Development MOU Memorandum of Understanding PPA Power Purchase Agreement PSDA Public Service Development Agency RE Renewable Energy STEM Science, Technology, Engineerng, and Math TPP Thermal Power Producer TRY Turkish Lira TSO Transmission System Operator UK The United Kingdom US United States USAID United States Agency for International Development VPN Virtual Private Network
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FIGURES Figure 1 – Blockchain Introduction ...... 10 Figure 2 – Blockchain Business Case Characteristics ...... 11 Figure 3 – Georgian Market Bilateral vs. Balancing Market ...... 11 Figure 4 – Illustrative Power Market Clearing Protocol ...... 13 Figure 5 – End-to-End Georgian Current-State Wholesale Settlement Process ...... 14 Figure 6 – Wholesale Market Design Considerations ...... 14 Figure 7 – Day Ahead Market Schedule ...... 15 Figure 8 – Blockchain as an IT System Integration Layer ...... 16 Figure 9 – Forgone Interest by Power Providers Due to Payment Delays ...... 17 Figure 10 – Blockchain Startup Investment Trends ...... 18 Figure 11 – Nord Pool Settlement Schedule ...... 20 Figure 12 – ECC Invoicing and Fee Collection Exchange Settlement Process ...... 21 Figure 13 – The Landscape of Blockchain Protocols ...... 24 Figure 14 – Blockchain Solution Primary Cost Drivers ...... 25 Figure 15 – Consortium Example ...... 26 Figure 16 – Blockchain Readiness Framework ...... 27 Figure 17 – Consortium Risk Assessment Framework ...... 28 Figure 18 – Blockchain Solution Readiness Framework ...... 34 Figure 19 – Key Considerations in Consortium Management ...... 38 Figure 20 – Blockchain Implementation Roadmap Framework ...... 39 Figure 21 – System Architecture Options and Considerations ...... 40 Figure 22 – Riddle&Code Smart Meter Technology ...... 42 Figure 23 – Notional Future State Power System Powered by Blockchain ...... 42
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CONTENTS
1. EXECUTIVE SUMMARY ...... 6 2. BACKGROUND: GEORGIAN POWER MARKET ASSESSMENT ...... 9 2.1 REPORT CONTEXT ...... 9 2.2 THE APPLICATION OF BLOCKCHAIN TO FUTURE-STATE GEORGIAN MARKET CLEARING AND SETTLEMENT OPERATIONS...... 15 2.3 THE CURRENT STATE OF BLOCKCHAIN DEPLOYMENT WORLDWIDE ...... 18 2.4 NON-DLT ELECTRICITY TRANSACTION SETTLEMENT PLATFORMS ...... 20 3. PROVIDING THE FOUNDATION FOR A BLOCKCHAIN SOLUTION ...... 23 3.1 TECHNICAL INFRASTRUCTURE ...... 23 3.2 CONSORTIUM ...... 26 4. SUITABILITY FOR BLOCKCHAIN IN THE GEORGIAN POWER MARKET ...... 27 4.1 RISK ANALYSIS...... 27 4.2 THE POLICY LANDSCAPE ...... 30 4.3 STAKEHOLDER LANDSCAPE ...... 32 5. RECOMMENDATIONS AND NEXT STEPS ...... 36 5.1 RECOMMENDATIONS TO GEORGIAN GOVERNMENT ...... 36 5.2 DEFINE TRANSFORMATIONAL ROADMAP ...... 38 5.3 A NOTIONAL EXAMPLE OF THE FUTURE ...... 42 6. REPORT REFERENCES ...... 44
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1. EXECUTIVE SUMMARY Georgian Power Sector Reform Since acceding to the European Energy Community (EEC) in 2017, Georgia has been actively pursuing power sector reforms to comply with the EEC’s policy requirements and to more effectively integrate with the energy community. The net effect of these reforms will be to create a more transparent power sector, whose operations are dictated by competitive market principles. One of the key areas for reform is the wholesale power market – where the country is moving from a system that can now take over 50 days to settle financial obligations, to a system that takes two to three days to settle – this is the “clearing and settlement” on which this report focuses. More specifically, this report explores the potential of using blockchain as an enabling technology to make this transition to a more efficient and timely settlement process. Why Blockchain? A blockchain is a digital and distributed ledger of transactions, recorded and replicated in real time across a network of computers or “nodes.” Each of these transactions must be cryptographically validated by the nodes before being permanently added as a new “block” at the end of the “chain.” A key benefit of this structure is that there is no need for a central authority to approve transactions, which is why a blockchain solution is sometimes referred to as operating in a “trustless” environment. This offers near-frictionless cooperation between any entities submitting transactions to the ledger, allowing them to transfer value or information without the need for an intermediary. In the power sector, this arrangement, along with the increased investment in key hardware – such as smart meters – and the need for real-time price setting information makes the potential application of blockchain technology a provocative concept. As this report goes on to detail, now is a particularly good time for power sector stakeholders worldwide to explore the technology, as pilots for the technology in the energy sector continue to proliferate. The three particularly compelling use cases include the following: VAKT: This organization is a collaborative initiative spawned by several multinational oil firms and financial services institutions to facilitate the buying and selling of North Sea oil futures – a complex process that involves dozens of intermediaries that finance and facilitate transactions through the execution of a number of labor-intensive agreements. With the VAKT solution, participating oil traders place trade details on a blockchain, which helps to inform the trade documentation facilitation process. VAKT’s experience provides insight into how the Georgian power sector might incorporate a financial market (trading of futures contracts) to supplement its reformed physical market (the buying and selling of electrons). LO3 Energy: LO3’s business model is to use blockchain as an enabler for distributed energy technology, or micro-grids. In short, they use a blockchain platform to so-called “prosumers” (i.e., retail power consumers who, through resources such as roof-mounted solar panels, both produce electricity that can be consumed by other retail stakeholders, and consume electricity for personal or industrial use) to sell and buy energy in near real time with other participants on the platform in their local distributed marketplace. Given that LO3 can settle power transactions in near real time, it is indicative of the capability of blockchain to perform that function in Georgia’s proposed future-state wholesale market. Enerchain: This initiative is potentially the most relevant case example for the Georgian market. Enerchain was launched by some of the largest power producers and retailers in the EEC to use a blockchain platform to trade wholesale electricity futures. The salience of this experience to the Georgian market, as it continues to mature, is that it brings together the ultimate vision for the deployment of blockchain in the power sector. Enerchain offers a glimpse into a future that in which blockchain is used not only to conduct operations such as wholesale power trades, but could even entail the dispatching of power, through the use of a decentralized platform and internet-of-things (IoT) hardware. It is worth noting that there continue to be non-blockchain platforms on which settlement functions can be performed – and many are utilized in modern power markets. This report goes on to detail some of the prevalent settlement systems in other jurisdictions. The key message, however, is that blockchain can be considered as not only an alternative to pre-existing platforms, but can also be used to integrate a variety existing systems. As an alternative, blockchain offers some core advantages, including:
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The shared ledger can be used to integrate various existing systems. Smart contract coding can make data, as it hits the ledger, actionable in real-time – executing complex functions as new information arrives. As even the most advanced wholesale market platforms – like Nord Pool – can require purchasers to post guarantees to cover the period during which financial obligations are settled, blockchain’s unprecedented transparency might reduce the incentive for such risk mitigating, and costly, steps. The transparency of the data stored on the ledger – provided that regulators are given some level of access, can reduce the cost of regulatory compliance, driven by the compilation and production of costly reports. Considerations for Deployment This report covers in detail the multiple considerations that stakeholders must take into account before developing a blockchain solution. As the technology is not simply a one-size-fits-all, the key power sector stakeholders in Georgia will have to assess alternatives and make decisions that make the most sense for their market. Considerations include: Permissioned or Permissionless: Blockchains fall under two types: permissionless and permissioned chains. Permissionless blockchains allow any party to participate without the need to establish access rights, while permissioned blockchains are formed by consortiums or an administrator who evaluate the participation of an entity on the blockchain framework. Infrastructure Needs: Blockchain as a solution has a unique set of infrastructure needs for public sector solutions. Just as there are coding languages that support development, an understanding of key methodologies to set up and maintain a virtual environment is beneficial. Technical Skills: Blockchain technology is still in its infancy as a technology, and new protocols and innovations are being discovered every day. An understanding each of these baseline blockchain protocols and how to implement them presents challenges for staffing, decision-making, and integration. Developing a Consortium: One of the key elements of blockchain technology is that for it to deliver value – especially in a permissioned environment – the stakeholders must form a consortium that manages the solution, and the constituent organizations must serve as nodes on the blockchain. Risk Assessment: The stakeholders should categorize, weight, and develop mitigation plans for all likely risks – which can either be classified as “standard” risks, “value transfer” risks, or “smart contract” risks. Policy Landscape: The solution, once developed, will exist within a policy context that is continuing to evolve. There continue to be a patchwork of EU and Georgian laws and regulations that could impact the deployment, investment in, and managing of a blockchain solution. Stakeholder Readiness: As this report goes on to detail, there are several stakeholders across the Georgian power sector that will likely be necessary members of a consortium, but span the spectrum in terms of readiness for adoption. This report concludes that the industry association, the Georgian Renewable Energy Development Association (GREDA), is the most well placed to drive the development of a blockchain solution. Recommendations As with any other technology investment, what is being addressed is a business issue – not a technology issue. Meaning, fundamental project management principles, investment decisions, and continued attention and commitment to a solution will dictate the technology’s success. Should Georgia choose to continue pursuing a blockchain solution for settlement in its future-state wholesale power market, it must address the following areas: Areas for Investment: Georgia will need to make considerable investments in its people (i.e., technical skill development and training) and processes (e.g., the types of reforms it is continuing to institute in its power sector).
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Consortium Development: The success of the solution is entirely contingent on a well-functioning consortium. At the current early stage, stakeholders should establish clear oversight and leadership, create a consortium management office, and establish project work streams. Transformational Roadmap: The power sector stakeholders should develop an articulable roadmap to conduct a full pilot of the blockchain solution using real operational data. Such roadmaps typically entail a discovery phase, a proof of concept phase, and an iterative user adoption and scaling phase. Pilot: The stakeholders, through an iterative process, should launch a pilot solution that is unconstrained by the scope limitations that guided the development of the initial prototype. Stakeholders will define and design a pilot together to ensure long term sustainability and value to all users.
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2. BACKGROUND: GEORGIAN POWER MARKET ASSESSMENT
2.1 REPORT CONTEXT Purpose Georgia’s power sector is in a period of transformational change. To join the EEC, the country is engaged in the long and challenging process of reforming its electricity sector so that it is compliant with that multilateral institution’s aggregated set of energy and power-related legislation, legal acts, and court decisions. This is not to suggest that Georgia is starting from ground zero – the country has a well- functioning power sector. That being said, the road to a fully competitive power market, entailing such efforts as establishing an independent market operator and the development of – at a minimum – a day-ahead wholesale power market will involve key decisions, a dedicated budget, and an abundance of technically skilled resources. The requisite risks, cost, duration, and manpower for Georgia’s transition and ongoing integration with the EEC will ultimately prove worthwhile, however, due to the scale of opportunity that such a move presents. Among the benefits that the power sector reform and EEC integration efforts will bring include fostering Source: Wikipedia an enabling environment that will incentivize foreign investment, encouraging a competitive landscape that drives down retail power prices for citizens, and establishing operational rules and mechanisms that enable its grid to integrate more diverse sources of energy, allowing for pathways to a more sustainable sector and Georgian energy independence. An often unstated opportunity for jurisdictions in the midst of such a transformation, however, is that in re- establishing the ground rules for the participation in, and operation of the electricity sector, policymakers create an opening to not just simply follow the existing leading practices of other jurisdictions, but to use this “white space” to incorporate new methods, mechanisms, and efficiencies to technologically leapfrog their contemporaries. While its peer country power sectors may be constrained by capital investments into a prior generation of technology that can take upwards of 30-years to turn over, and by engrained operating systems and platforms whose switching costs are likely prohibitive, during this period of transition Georgia does not face similar constraints. The country is thus presented with the liberty to design a system that not only meets but also exceeds leading global practices in power system operations. That is where this report comes in. In the subsequent pages, this report explores the capacity of “blockchain” as a method to modernize or rethink the traditional power delivery and energy trading models employed by countries and sub-national jurisdictions worldwide and the potential for it to be deployed in the Georgian power sector context. The report will examine with particularity the power sector reforms Georgia is pursuing, the elements of power system operations that present strong use cases for blockchain, instances where blockchain has previously been deployed in power sectors worldwide, the readiness of Georgian institutions to implement such a solution, and the technical requirements for deployment.
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What is Blockchain? Figure 1 – Blockchain Introduction A blockchain is a digital and distributed ledger of transactions, recorded and replicated in real time across a network of computers or “nodes.” Every transaction must be cryptographically validated via a consensus mechanism executed by the nodes before being permanently added as a new “block” at the end of the “chain.” A key benefit of this structure is that there is no need for a central authority to approve transactions, which is why a blockchain solution is sometimes referred to as operating in a “trustless” environment. This offers near- frictionless cooperation between any entities submitting transactions to the ledger, allowing them to transfer value or information without the need of an intermediary. In the power sector, this arrangement, along with the increased investment in distributed energy resources, the proliferation of Internet of Things (IoT) hardware and software, and the need for real- time price setting information make the potential application of blockchain technology a provocative concept. Figure 1 provides an illustrative explainer of the step-by-step functioning of the technology. This report will later discuss specific potential applications and use cases in the power sector, but it is worth noting here the situations in which the technology’s unique value proposition is best Source: Deloitte captured. In short, the business cases in which the technology is best leveraged are those in which multiple independent parties need to interact with, update, or reference a common set of data. Blockchain can be applied in these instances to perform record keeping and value transfer or transactional functions. Figure 2 describes the core characteristics of the technology that allow it to facilitate such business operations.
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Figure 2 – Blockchain Business Case Characteristics
Source: Deloitte
Status of Georgia’s EEC Accession By acceding to the EEC on July 1, 2017, Georgia marked a clear commitment to closer ties with the EU and the eight other Western Balkan and Black Sea region contracting countries of the EEC, including Albania, Bosnia and Herzegovina, Kosovo, North Macedonia, Montenegro, Serbia, Moldova, and Ukraine. In doing so, and ultimately agreeing to purchase from and sell power into the shared energy system, however, the country has also committed to move toward compliance with the European Union’s (EU’s) energy legislation, including common rules for the internal market in electricity, for access to the network for cross-border exchanges in electricity, security of electricity supply, and for infrastructure investment. The broad policy harmonization effort Georgia is undertaking is not only compliance-driven and a precondition of entry into the EEC, but it is in recognition of the country’s need to modernize its power sector and to develop a more open, competitive, and liquid market for electricity. Among the forthcoming modifications to the market, the following are included: Opening the wholesale electricity market for fully open access, gradual repeal of tariff regulation, and the establishment of market-based pricing for power; The creation of a day-ahead market for electricity; Unbundling distribution companies; Introducing transmission system operator (TSO) certification requirements; Adopting customer switching rules; Phasing out sovereign-guaranteed long term power purchase agreements (PPAs). Of the multiple market reforms listed above, this report deals primarily with Georgia’s pathway to the establishment of market-based pricing for power in part through the establishment of a day-ahead market (DAM) for wholesale electricity. The operational elements of this prospective market model are particularly conducive to a blockchain-based solution in the Georgian power market, and the full range of implications are best understood within the Figure 3 – Georgian Market Bilateral vs. Balancing Market context of the existing market model, which is described in the next subsection. The Current Market Model The wholesale electricity market in Georgia is based on direct bilateral purchase agreements between sellers and buyers of all types. Buyers can range in terms of their type of electricity use, from electricity transmission and dispatch licensees and so-called qualified
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Source: ESCO
enterprises – which include electricity generation and distribution licensees, small power plants, importers, exporters – and end-users of sufficient scale / power usage, such as companies with a large industrial or commercial real estate footprint. As of 2017, these bilateral agreements – where prices are set directly between the seller and purchaser or reseller – constituted 79.8% of the pricing in the wholesale market. The role of the country’s single market operator, the Electricity System Commercial Operator (ESCO), is to purchase sufficient balancing electricity and firm capacity to compensate for any underproduction on the part of the bilateral power producers and any overconsumption of bilateral consumers. To perform this function, ESCO secures reserves with thermal power producers (TPP) who receive a predetermined capacity fee, provides certain hydropower producers with long-term take-or-pay power purchase agreements (PPAs) at fixed rates, and covers any remaining gap with power imports from neighboring countries. This “balancing market” in 2017 constituted 20.2% of wholesale power pricing – see Figure 3 for a breakdown of the comparative volumes of power provided using the two separate wholesale market pricing mechanisms. It is important to note, however, due to the high proportion of hydropower production in the country and the seasonality of that production, what part of wholesale power pricing is determined by bilateral contracts or by the balancing market can vary year-over-year. But the key takeaway in the pricing structures is that there is very limited visibility into the bilateral market – those prices are determined contractually between the parties, and the parties only provide ESCO with the prospective electricity volumes to be delivered. ESCO then covers any remaining gap due to underproduction or overconsumption by pooling different rates – due to different contractual mechanisms – into one average price that it applies to bilateral consumers who consumed greater volumes than their bilateral counterpart produced. The wholesale market model, as currently implemented and described above, leads to problematic issues of information asymmetry and intermediation. The information asymmetry stems from ESCO operating as a choke point for information – only ESCO has a market-wide accounting for the system-wide volumes to be transmitted pursuant bilateral contracts, and as such, supply and demand information is only aggregated and published after-the-fact. Were such information to be available in something approaching real time, producers and consumers might have a sense as to how to optimize pricing to reflect system-wide demand. This also speaks to the broader issue of intermediation, which in this case is reflected by ESCO’s central role in the process. Currently, ESCO maintains an internal database/registry of all volumes to be sold in the wholesale market, allowing it to ascertain the amount of residual balancing power provided (which it calculates in arrears on a monthly basis). This allows it to determine the pooled price paid for the residual or balancing electricity, which it charges to consumers whose consumption has exceeded their counterparty’s production. The downstream market distortions to which this can lead include: Suboptimal bilateral contracting volumes (e.g., contracting for more than what is required to avoid exposure to balancing market pricing); Missed revenue opportunities for sellers due to low visibility into market-wide demand; Extraordinary counterparty risk – ESCO only determines the balancing market volume delivered and the corresponding payment to be made by buyers one month in arrears (after consumption). As such, producers in the balancing market (unless party to a balancing market PPA with a sovereign guarantee) are exposed to the risk of delayed or missed payments on the part of buyers or even ESCO itself. Note here, while the market rules do provide for financial guarantees, they may only be requested from the buyer after it delays payment for more than five days. Since payments are made monthly, this provision is of very little consequence; Suboptimal retail pricing due to lack of competition in the wholesale market, due to the prevalence of bilateral deals and lack of visibility into forward-looking demand/supply; Potential underfunding grid assets due to retail rates driven more by political prerogatives than market dynamics.
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Clearing and Settlement When discussing the operation of wholesale Figure 4 – Illustrative Power Market Clearing Protocol power markets, the terms “clearing” and “settlement” can often carry different meanings depending on the operational context. Typically the terms are linked as “clearing and settlement” referring in total to the process by which financial obligations of market participants are settled through the operation of established clearinghouses, which execute the functions and manage the risks of crediting and debiting market participants’ accounts. The precondition to settling these financial obligations is establishing them. The establishment of participants’ financial obligations occurs through the purchase and delivery of power through market operations of the type discussed in the previous section – those operations result in a market-clearing price that producers receive, the costs of which are passed on, ultimately, to an end consumer. Although these financial obligations in Georgia are established through bilateral contracts and ESCO’s ad hoc agreements Source: Deloitte with balancing market participants, most mature power markets establish a market-clearing price through a bid/ask protocol – where a central market operator solicits bids for a quantity of delivered power based on market demand over a defined time interval. Once the market operator receives bids of sufficient volume to satisfy the market demand, the market operator confers the right to produce and deliver power via the transmission system to the bidders whose aggregate volume comes at the lowest cost to the system. The operator measures the cost by setting the uniform market price as the highest bid last required to meet market demand – this is the price at which the market “clears.” An illustrative example of this process is found in Figure 4, where each bar represents one bidder. For this report, “clearing” means the market bid/ask market clearing mechanism, and “settlement” means the set of activities required to settle all financial obligations, making all market participants whole. Clearing and Settlement in Georgia As discussed in the overview of the existing Georgian electricity market model, Georgia does not conduct a centrally organized market-clearing bid/ask process. Instead, one month after power delivery and consumption takes place, ESCO determines how much the bilateral producers produced and how much consumers consumed, and after calculating per consumer the difference between their consumption and their bilateral counterparty’s production, ESCO bills the consumer for the difference using the balancing market average price. The bilateral counterparties make each other whole financially for the power delivered under their contract without the involvement of ESCO. In short, then, no one Georgian entity executes a clearing process – it is instead mostly a series of independent transactions – and the determination and settlement of financial obligations always occurs approximately one month in arrears. Figure 5 depicts the clearing and settlement process in the Georgian market as it exists today.
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Figure 5 – End-to-End Georgian Current-State Wholesale Settlement Process
Source: G4G
As can be seen from the above graphic, the actual settlement of financial obligations, including the calculation of the volume of balancing power delivered, can take up to 58 days after the physical delivery of power onto the grid. Future State: Day-Ahead Market As one of the first major steps towards full market liberalization and integration with the EEC, Georgia developed and approved the Concept Design of the Georgian Electricity Market (the Concept). The Concept defines the structure of the future market and forms the basis for a more detailed design to be adopted sometime in 2019. Typically, when a jurisdiction is conceiving design elements for its market operations, several options come under consideration. For wholesale power purchasing, for instance, jurisdictions may adopt – among other options – a real-time, hour-ahead, or day-ahead bid/ask protocol. See Figure 6 for a detailed breakout of options to consider during wholesale market design. Figure 6 – Wholesale Market Design Considerations
Source: USAID
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In the Concept, Georgia elected to implement a day-ahead wholesale electricity market (DAM), offering market participants an organized structure to submit bids for daily production volume for the next day (the “day ahead”) through a blind auction operated by a single Market Operator (MO). The market will use a marginal pricing model. The Concept does not limit market participants to participating exclusively in the DAM, as the proposed design allows participants to continue to enter into bilateral agreements at freely negotiated prices without intermediaries, settling transactions directly between themselves. All such contracts will have to be registered with the transmission service operator (TSO). The Concept also retains the notion of a balancing market, which is still necessary for the MO to be compensated for the delivery of any residual power that it delivers to account for power supply and demand imbalances. The biggest change to the balancing market from the current state will be in introducing “balancing responsible parties,” which will shift power imbalance responsibilities to specific market participants responsible for imbalances, who will individually determine the price for balancing services and calculate the imbalance settlement price. Georgia will continue to define detailed rules of participating and trading on any of the markets mentioned above in specific DAM rules, balancing market rules, and grid codes.
2.2 THE APPLICATION OF BLOCKCHAIN TO FUTURE-STATE GEORGIAN MARKET CLEARING AND SETTLEMENT OPERATIONS Due to the still-ongoing state of the design of the future Georgian power market, concerning the applicability of blockchain technology, this report focuses exclusively on the proposed DAM in the Concept. As it stands, the DAM is the most well-defined portion of the future state vision, represents the likely primary vehicle through which the MO will purchase wholesale electricity, and is a feature of modern electricity systems throughout the world – and as such finds multiple useful concrete examples of its application and operation. To understand how blockchain might facilitate clearing and settlement operations in the DAM, it is worthwhile first to have a clear understanding of how those operations transpire in most markets. Figure 7 offers a graphical example of the DAM as applied by the Nord Pool market in which multiple northern European countries participate. As can be seen, the bid and ask protocol begins at noon on the day before power delivery and consumption (the “Operating day”). Within an hour, the market operator clears the market at a clearing price, and sends the dispatch – or operational – schedule to the transmission system operator (TSO), who in turn dispatches electricity from the winning bidders on the Operating day. In more mature markets, such as Nord Pool, the system supplements the DAM with an intraday and regulating market that accounts for imbalances in power delivery commitments, actual production, and fluctuation in consumption patterns; however, to analyze blockchain’s applicability, this report focuses only on the DAM.
Figure 7 – Day Ahead Market Schedule
Source: USAID
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The settlement of financial obligations in this DAM model happens only after the Operating day – where the market operator reconciles the power delivery commitments made by the bidders against the actual power delivered as reflected in electricity meter readings. The clearing house (CH) then settles with the power providers at the clearing price for the volume of power bid less any underproduction or plus any surplus power provided. This post-delivery settlement process, even in the case of an advanced market like Nord Pool, occurs over three days – with the CH paying the power providers at 11:00 am two days after the Operating day, and wholesale buyers paying the CH at 11:00 am one day after the Operating day. Moreover, wholesale buyers are required to post to a clearinghouse collateral guarantees equivalent to two to three days of forecasted transaction volumes, to cover the risk payment failure. However, when it comes to the physical settlement between balancing responsible party (BRP) and power providers/consumers, recalculation of financial obligations usually occurs by the end of the month based on the meter readings. DAMs, as operated in multiple wholesale electricity markets across the globe, are substantially similar to the Nord Pool marketplace discussed above. These operations essentially entail some derivative of a blind auction or bid and ask protocol, followed by a market clearing exercise, and the settlement of obligations through reconciliation of power supply bids, and power supply actual deliveries. In mature wholesale power markets, these operations typically occur through advanced IT ecosystems. That said, despite the technological leap this system represents form the approximately 55-58 days clearing and settlement process featured in the Georgian market, there remain opportunities for improvement, as the issues of information asymmetry and intermediation persist. The abundance of disparate IT ecosystems across the various stakeholders suppresses the availability and timeliness of supply and demand information, and the centralized market operator that acts as the auctioneer – operating the bid and ask operations – presents a chokepoint for production, payer liquidity, and pricing information. A blockchain-based platform presents an opportunity to address some of these shortcomings in a prevailing DAM (the future state of the Georgian market), reduce transaction costs, and shrink the 3-day settlement period in the following ways: The Shared Ledger – In most current state DAMs, disparate IT systems or databases tend to confine information to the purview of the particular stakeholder who owns the platform – relying on data requests, reports, and email communication to share such information. A blockchain “layer” provides the opportunity to integrate these disparate systems such that several stakeholders have visibility into relevant data held by other stakeholders. This can facilitate pricing, production planning, consumption behavior, and market participation. Figure 8 provides an illustration that depicts the “integration layer” dynamic that blockchain can bring to disparate systems. Smart Contracts – Smart contracts are programmed software code that leverage the data on the shared ledger as inputs which, when certain criteria are met, execute a function. This capacity can be used, for instance, in the settlement process, such that when bid data and meter readings of actual power production are both verified as true through the consensus mechanism on the blockchain, payment obligations can immediately settle – through an auto-debit of one account and an auto-credit of the counterparty. When such software and functionality is combined with smart machine sensors and hardware (termed the internet of things or IoT), the possibilities for grid operations raise well beyond simply facilitating transaction settlement. IoT technology, for instance, could enable a blockchain solution to automatically dispatch power providers when the market clears – without needing to send a dispatch schedule to a transmission operator. Similarly, IoT combined with blockchain might enable businesses to throttle down consumption when prices escalate beyond a predetermined point. Figure 8 – Blockchain as an IT System Integration Layer
Source: Deloitte USAID | GOVERNING FOR GROWTH (G4G) IN GEORGIA BLOCKCHAIN: AN ENABLER FOR POWER MARKET OPERATIONS 16
Compliance Costs – Wholesale market participants’ cost of compliance with the patchwork of new legislation, regulations, and court orders set to be incorporated into the legal landscape during Georgia’s integration into the EEC should not be underestimated. The level of personnel and labor required to assess the state of new policies, analyze their impact, and produce reports that attest to a participant’s compliance with those policies, can be substantial. The advantage of putting compliance- relevant information on a blockchain is that the cost of producing such reports can be pushed onto the regulator, who will have access to raw data and can synthesize the information as required. Similarly, the likelihood of a costly audit diminishes when the level of transparency and the immutability of information increase. Reduction of Guarantees – Most DAM structures use a market clearinghouse as an intermediary to reduce the risk of counterpart illiquidity, or partial or missed payments on the part of purchasers. Nord Pool, for instance – as mentioned above – requires wholesale purchasers to provide guarantees equivalent to two to three days of forecasted transaction volumes. These guarantees, however, exist only to cover the risk that purchasers will be unable to pay between the point of consumption and the point of payment, two-to-three days later. If the duration between consumption and settlement shortens such that a smart contract can automatically debit or credit accounts based on meter readings and clearing price information, then the need for a central clearinghouse and corresponding guarantees diminishes. Figure 9 below provides a compelling insight into how much money power producers forgo in lost earned interest over the course of the year, using ESCO source data for volumes of balancing electricity provided and likely payments over the course of a typical twelve- month year, and a conservative 6.7% prevailing short term interest rate (Appendix A).
Figure 9 – Forgone Interest by Power Providers Due to Payment Delays
Days for Annual Cost of Market Reform Scenario settlement Money
Current State 55 $667,526.48
Day Ahead 2 $24,273.37
Blockchain 1 $12,136.68 *Prevailing Short Term Interest Rate: 6.7%
As covered in the next section, the listing of the foregoing advantages of DLT in transaction-heavy market operations – in any sector – is not only a theoretical exercise. These are advantages driving the deployment of blockchain-based solutions in several markets right now.
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Figure 10 – Blockchain Startup Investment Trends
2.3 THE CURRENT STATE OF BLOCKCHAIN DEPLOYMENT WORLDWIDE Blockchain applications in pilot or production phase span all industries, from real estate to the financial services and energy and resources sector. All these industries tend to be heavily transactional and dependent on intermediaries to facilitate those transactions – whether to mitigate credit risk, transfer title to an item of value, or to ensure dealings are conducted in good faith and are compliant with relevant regulations and statutes. And in each instance of the deployment of a blockchain pilot, those industry stakeholders have noted the value of the technology to facilitate those transactions – namely those outlined in the previous section. The disintermediation of the transaction and the corresponding reduction in transaction costs have gained such widespread recognition across sectors, that blockchain Source: Crunchbase News pilots have proliferated across the commercial landscape, and have begun entering full production. As but one measure of the rate of blockchain adoption, venture capital funding of blockchain companies exceeded $1.3 billion in the first five months of 2018 alone – a figure that topped the cumulative total of the previous 18 months, and that dwarfs any total year before that (see Figure 10). This trend of blockchain deployment and adoption has also increasingly affected the energy and natural resources industry – in applications that are of particular salience to the future state Georgian wholesale electricity market. Provided below are key examples of applications in the industry that emphasize blockchain’s value in several contexts that are relevant to the development of Georgia’s DAM. Case Study 1: VAKT – Reducing Transactional Friction in the Energy Futures Market VAKT’s vision is to put the entire global commodities trading industry onto a secure and trusted digital ecosystem or platform. It has begun by collaborating with several multinational oil firms and financial services institutions to launch an in-production blockchain-based solution that facilitates the buying and selling of North Sea oil futures. In the oil futures market, where VAKT has made its initial foray, the company operates as a post-trade management platform, aiming to transform the full post-trade life cycle. The trading of oil contracts is a complex process that involves dozens of intermediaries that finance and facilitate transactions through the execution of several labor-intensive agreements, including the initial sales contract, shipping bills of lading, letters of credit, and letters of intent. With VAKT, the participating oil traders place trade details on a blockchain, which helps to inform the trade documentation facilitating the process – it offers a single source of truth such that bankers, logistics companies, and other third parties to the trade no longer need to conduct time-consuming verification and validation procedures. The implementation of VAKT in this post-trade life cycle has seen document processing times cut to a fifth of the average in some instances, and one oil trade witnessed a transaction cost savings of 25-30%.1 The institutions that have signed on to operate with VAKT are indicative of the platform’s promise beyond the immediate sector in which it operates – they include, among others, BP, Chevron, Societe Generale, Total, Equinor, ING, and Koch Industries Inc. Oil traders’ experience with the VAKT platform provides insight into the possibilities for blockchain’s incorporation into the Georgian electricity ecosystem, as the sector continues to evolve. As yet, Georgian electricity sector stakeholders have only contemplated – in the near to medium term – the launch of a physical market in which to purchase and sell wholesale electricity. More mature markets, however, supplement a physical market with a financial one – allowing participants to trade electricity futures in an attempt to hedge against the risk of volatility. Such transactions involve exactly the type of overhead the VAKT platform was created to circumvent. As Georgia begins to think through this next phase, it might seek to make such a
1 https://www.ft.com/content/648c3dda-bb47-11e8-8274-55b72926558f
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market “blockchain native” such that it incorporates the technology as an integral component from the outset, as opposed to having to modify the market after it has already launched.
Case Study 2: LO3 Energy – Peer-to-Peer Trading Enabling Distributed Energy and Reduced Reliance on the Grid LO3 Energy is a pioneer in using blockchain – through its proprietary Exergy or TransActiveGrid platform. Its business model is to enable so-called “prosumers” (i.e., retail power consumers who, through resources such as roof-mounted solar panels, both produce electricity that can be consumed by other retail stakeholders, and consume electricity for personal or industrial use) to sell and buy energy in near real time with other participants on the platform in their local distributed marketplace. The effect of introducing such an enabling technology into this marketplace is to make more pragmatic the incorporation of distributed energy configurations like micro-grids and mini-grids into the broader electricity ecosystem. The LO3 platform facilitates the inclusion of these prosumer resources into the ecosystem by making it possible to log every unit of energy created by a home system and, using smart contracts, making those units of energy available to be bought and sold in the community that comprises the micro or mini-grid, using PayPal to execute transactions. Net electricity users can define their energy requirements – choosing exactly where they buy from – and this process, if the net users are willing, is capable of being automated through a hands- off control system, where net users passively define requirements and source energy from surplus resources. LO3’s first deployed a proof-of-concept for this solution is in the Brooklyn borough of New York City, where it has developed a solar micro-grid. In this model, the local retail electricity provider (the “utility”) still maintains the distribution network that delivers power, but the actual energy is generated, stored, and traded locally by members of the community or micro-grid network. The viability of this model presents several implications to the still-developing Georgian electricity market. Among them include the fact that excess or surplus production of energy can be actively sold on a blockchain- enabled platform. From Georgia’s perspective, this means that, even in the envisioned DAM, the financial settlement of the consumption of balancing electricity can be accomplished through blockchain. Similarly, LO3’s execution of sales through PayPal points to the potential that, should wholesale market participants all participate on the platform, payments and the settlement of financial obligations can happen in near real time. Yet another lesson to be learned from LO3’s experience in Brooklyn is that its concept demonstrates that nodes of users can depend on self-generation to a certain extent, reducing their reliance on the central grid, and the grid’s reliance on additional power generation. This latter point offers the prospect, particularly for Georgia, that they may require less imported electricity.
Case Study 3: Enerchain – Wholesale Power Trading In potentially the most relevant case example for the Georgian market, Enerchain is an initiative launched by some of the largest power producers and retailers in the EEC to use a blockchain platform to trade wholesale electricity futures. The German company Ponton launched the initiative in 2016 by working with 39 power and gas trading companies – including multinational renewable energy producers such as Enel, E.ON, and Iberdrola and power retailers such as Austrian firm, Wien Energie – to build a peer-to-peer platform that it has iterated since the initial development. Much like the case of VAKT, Enerchain seeks to use the shared ledger/platform to execute electricity futures trades. The initiative marked its first success in executing such a trade in November 2016, when power trading firms Yuso and Priogen consummated a trade on the Enerchain platform for power to be delivered in the Belgian DAM. The initiative has since announced that its first in- production version will go live on May 20, 2019. The salience of this experience to the Georgian market, as it continues to mature, cannot be overstated. The ultimate vision for the deployment of blockchain in the power sector is to conduct operations such as wholesale power trades, and ultimately even the dispatching of power, through the use of a decentralized platform – and ultimately IoT hardware – rendering market intermediaries obsolete. Enerchain’s continuing maturation in this space is evidence that aggressively pursuing such next-gen technology – particularly when designing a market – might yield potential efficiencies, cost savings, and innovative capacity.
A Caveat: The Solution Set is Still in its Infancy As stated at the outset of this report, the potential for blockchain to be a disruptor in power markets is tantalizing. Given the issues of information asymmetry and intermediation in even the most advanced power
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markets, blockchain seems to present a clear use case. Moreover, the technology is finding increasing resonance in capital markets and is experiencing a stunning growth trajectory. That being said, it is important to note that the solutions produced using blockchain – particularly in the energy sector – are still in their infancy. There has yet to exist a fully functional soup-to-nuts blockchain platform on which an entire power system fully relies, but that is not to suggest such a vision is infeasible. Power sectors in most advanced markets are unique in their slow uptake of technological innovation. After all, capital investments in new power generation facilities and grid installations can experience useful lives of 30 years – and such slow turnover can present obstacles to new methods and technologies. That is why countries such as Georgia, that are presently reconsidering the business operations of their power markets, are ideally situated to be first movers in adopting blockchain technology.
2.4 NON-DLT ELECTRICITY TRANSACTION SETTLEMENT PLATFORMS Given the caveat concluding the previous section – that while blockchain appears to be a technology that is ready to deploy in power market and exchange operations, it is a technology that is still nascent – it is worth considering briefly some of the prevailing exchange platforms being used in some of Georgia’s neighboring markets. The established electricity exchanges operating in Europe and Turkey, for example, include Nord Pool, European Commodity Clearing (ECC), and Takasbank, and each has their own clearing and settlement mechanisms. This report briefly covers the basics of the setup and settlement operations of each platform below. Nord Pool Nord Pool is Europe's leading power market and offers trading, clearing, settlement and associated services in both the day-ahead and intraday markets across nine European countries. Three-hundred eighty companies from 20 countries trade on Nord Pool’s markets in the Nordic and Baltic regions, in Germany, and the UK. Nord Pool delivers day-ahead and intraday trading, and market clearing and settlement functions to customers. In 2018, participants traded 524 TWh of electricity through the platform, an increase from 512 TWh in 2017.
The system settles all financial obligations according to a daily settlement schedule, and all customers are required to establish a designated bank account for settlement purposes. Market participants are required to designate settlement accounts in banks located within the European Economic Area (EEA), and the bank must be equipped to send and receive swift messages. All trades are settled daily. The settlement schedule for the Nord Pool DAM gives a schematic overview of a normal week's settlement cycles (See Figure 11 below and Figure 7 in section 1.2 for further detail): Settlement is run every business day at 14:00 CET; Payment deadlines are at 11:00 CET every business day; Settlement for the day-ahead market is run on the trading day, with debit due one day after and credit due two days after.
Figure 11 – Nord Pool Settlement Schedule
Source: G4G
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ECC ECC is the leading clearinghouse for energy and commodity products in Europe. ECC assumes the counterparty risk and guarantees the settlement of transactions, providing security and risk-mitigating instruments for its customers. As part of EEX Group, ECC provides clearing services for EEX, EPEX SPOT, EPEX SPOT Belgium, Powernext and PXE as well as the partner exchanges HUDEX, HUPX, and NOREXECO. In 2016, participants traded 520.7 TWh of electricity through the platform, up from 460 TWh in 2015. As a central counterparty, ECC guarantees financial fulfillment and carries out settlement for all transactions concluded on ECC’s partner exchanges. ECC co-operates with international banks as clearing members and settlement banks. ECC collects fees on behalf of exchanges from the participants via their settlement bank. Partner exchanges issue corresponding invoices, but ECC also offers an invoicing service. Through the invoicing service, ECC generates an invoice for each exchange-trading participant on behalf and for the account of the exchange. This service includes the collection of fees and dispatching invoices. Figure 12 illustrates this fee collection and invoicing process.
Figure 12 – ECC Invoicing and Fee Collection Exchange Settlement Process
Source: ECC Takasbank Turkey has seen a significant transformation of its electricity market since it introduced its DAM in 2011 and subsequently established the EPIAS power exchange in 2013. Under the new electricity market law, the Turkish market deployed the following structure: Spot Market – operated by EPIAS on day-ahead and intraday markets; Balancing Market – operated by TEiAS; Forward Market – operated by Borsa Istanbul through standardized electricity contracts; Derivatives Market – operated by Borsa Istanbul through electricity derivatives contracts. Takasbank has been authorized as the central settlement bank to be used by the MO and market participants to operate the collateral mechanism in the electricity market, ensuring timely submission of payments, and maintaining continuous cash flow in the market. In 2018, the bank was the central clearinghouse for 1,220 transactions, totaling approximately 35.5 billion Turkish Lira (TRY) annually. As the single central authority in the Turkish market, Takasbank needs only to run a very simplified structure – the participants in the market maintain accounts at the bank that serve as settlement accounts, and as such, accounts receivable and payable information are easily transmitted within the bank’s internal IT ecosystem. Despite the simplified ecosystem, and use of a single platform used exclusively by bank account holders, financial obligations can take between six and seven days to settle.
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A Note on Non-DLT Settlement Platforms The descriptions of the platforms are not intended to be an exhaustive list of potential options for settlement protocols in the future Georgian DAM. Rather, these descriptions are provided to provide insights into the prevailing systems used by Georgia’s neighbors, many of which are members of the EEC. These mechanisms represent the conventional approach to settlement, and in many instances – as can be seen from the experiences in the Turkish and Nord Pool markets – settlement can still take multiple days to execute, despite the modern infrastructure. A blockchain-based solution, by contrast, offers the promise that through removing the centralized clearinghouse function, power sector transactions might be sped up, costs can come down, and transparency enhanced.
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3. PROVIDING THE FOUNDATION FOR A BLOCKCHAIN SOLUTION
3.1 TECHNICAL INFRASTRUCTURE Permissioned and Permissionless Blockchains Blockchains fall under two types: permissionless and permissioned chains. Permissionless blockchains allow any party to participate without the need to establish access rights, while permissioned blockchains are formed by consortiums or an administrator who evaluate the participation of an entity on the blockchain framework. Permissionless blockchains start with a pool of cryptocurrency to pay service providers, or miners, to participate. Miners are service providers who update the general ledger with transactions that occur between participants. Anyone can participate as a miner as long as they meet certain technological requirements dictated by the network. No other entity checks, such as know your customer (KYC) or other background checks of the service provider, are possible in this framework. Anyone acquiring this cryptocurrency on the blockchain framework can transact with any entity on the blockchain. Additionally, permissionless blockchains have scalability and privacy issues that pose a significant risk to the use of this framework by financial or business institutions. Permissioned blockchains do not have the aforementioned cryptocurrency requirement. The consortium network or the administrator can predefine the ledger-update process without the use of miners or unverified service providers. Usually, this predefinition process involves a choice of a consensus algorithm that is deployed on the network. Additionally, scalability and privacy issues can be handled by the choice of infrastructure by the participants, and suspicious activity can be monitored across the network by the administrator or the consortium. Therefore, this framework is more suitable for institutions to use with a group of known and predetermined peers. Specific to the Georgian power market, we would suggest a permissioned blockchain solution for three reasons: A relatively small number of deregulated power providers; Regulations in place to limit renewable energy providers and micro-grids; Permissioned blockchains are more efficient and therefore, higher performing. Infrastructure Needs Blockchain as a solution has a unique set of infrastructure needs for public sector solutions. Just as there are coding languages that support development, an understanding of key methodologies to set up and maintain a virtual environment is beneficial. Public sector blockchains are typically hosted on a cloud solution due to the long-term costs, benefits, and scalability entailed in maintaining the solution. The core skills that are vital to hosting a public sector blockchain include an understanding of establishing and granting access via a virtual private network (VPN) and the management of private keys. Securing access to the blockchain and the private keys are vital, and there are available solutions native to cloud services. For example, the cloud service Azure leverages Azure Key Vault. Although hardware security modules are not necessary for prototyping, they are mandatory for any pilot or production solution.
Technical Skills As USAID discussed in its January 16, 2019 report, “Georgia’s Innovation Strategy and Recommendations,” Georgia should make additional educational investments in science, technology, engineering, and math (STEM) subjects. Blockchain technology could serve as a catalyst for technology interest and innovation in the region. Georgia will have to make key decisions concerning what talent it fosters within its government agencies, and what talent it chooses to outsource. As was the case with the land registry blockchain solution, Georgia typically maintains software development activities in-house releasing only the most technical aspects for
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public tender. Adjusting competitive procurement strategy to incorporate more “buy” versus “make” decisions would increase competition and provide additional, non-government opportunities to technologists. Blockchain is still in its infancy as a technology, and new protocols and Figure 13 – The Landscape of Blockchain Protocols innovations are being discovered every day. A key challenge is the variation of protocols and corresponding knowledge required to implement each. For example, Ethereum has proven beneficial as a smart contract platform across various industries. R3 Corda has been optimized for financial services. Quorum is a variation of Ethereum with a focus on enterprise solutions. The result is that understanding each of these baseline blockchain protocols and how to implement them presents challenges for staffing, decision-making, and integration. Figure 13 provides a non-exhaustive landscape of blockchain protocols, integration program languages, platforms, and delivery methodologies that reflect the still fluid state of the technology. The overarching IT strategy for implementing a blockchain solution should focus on building a knowledge base focused on the most common protocols while outsourcing Source: Deloitte where appropriate. From a functional perspective, stakeholders considering the analysis of alternatives (AoA) should be aware of the blockchain landscape and be able to consider the most appropriate option based on the problem they are trying to solve. Focusing on any specific protocol at this point would limit solution opportunities or create situations where stakeholders forgo an optimal platform because of their familiarity with an alternative solution. The blockchain landscape continues to evolve as new methods of combining the various technologies to identify new solutions are occurring every day. In general, object-oriented languages – such as the two cited below – are preferred: C++: Widely used across many popular platforms as the core coding language and the language leveraged for a smart contract mechanism; Java: Similar to C++, this language is widely used across various platforms. As with any software development – and especially for blockchains – performance considerations should be at the front of every developer’s mind. The challenge is that unlike other software solutions where parallel processing is encouraged to speed operations, blockchains have key processes that must occur in sequence or a “serial method.” The integrity of the ledger is based on the concept of time-stamped transactions that are balanced and verified before execution. If, for example, person A gives an item to person B who gives it to person C in near real time, traditional methods may suggest simply recording ownership as belonging to C. Blockchains must track the value stream from A to C and therefore the process must occur in sequence. There may be opportunities for parallel processing, such as smart contracts, but they must be approached selectively. In addition to the physical environment, blockchain, like a database, is rarely accessed directly, and is more likely accessed through a user-friendly graphical interface, or “front-end.” These front-end solutions can be very flexible and conducive to design based on ubiquitous skillsets. Examples of common front-end coding languages that have been leveraged for blockchain platforms include the following: JavaScript: There are many examples where this language is used to build a blockchain solution from scratch. Although it is not used in many categories of platforms, JavaScript does provide certain benefits as it relates to web-based front-end solutions, which is critical to many development efforts. Python: Similar to JavaScript, this language is used for some platforms but could serve as a critical coding language for off chain data storage.
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Additionally, depending on the solution, Georgians may need to develop and promote skills in various data exchange protocols, application programming interfaces (APIs), and general database development. Blockchain solutions typically leverage off chain data that could be stored on an organization’s traditional systems, a shared database with select information on a solution like MongoDB or leveraging available decentralized storage solutions such as Stacks or Interplanetary File System (IPFS). IPFS is proven to improve the performance of a blockchain solution and has increased the rates at which organizations can share information. This is because IPFS uses hash functions to efficiently map files for storage for recall at a future date. IPFS may be a good fit for Georgia because the country previously explored this method to manage land records – Georgia currently uses IPFS to store public land records on the Bitcoin blockchain. This hashing method is beneficial for blockchains because large files are compressed so that a hash of fixed size is stored as the transaction instead of the data itself (divorced of the hash). This process minimizes the size of the blockchain and improves performance over time. Total Lifecycle Costs The total cost of building a blockchain solution is difficult to determine early in the process, but there are leading factors to consider when defining high-level business requirements. Project scope and the number of partners are not unique to blockchain solutions, but these two areas have the largest impact on total lifecycle costs. As can be seen in Figure 14, there are five unique cost drivers with two that overlap.
Figure 14 – Blockchain Solution Primary Cost Drivers
Source: Deloitte
Once these primary scope and scale assumptions are made, a consortium that manages a permissoned network can estimate costs aligned into the following six categories: Personnel for Solution Development – Costs associated with the initial development efforts, which could leverage internal or external talent; Technology Acquisitions – Depending on the scope and number of partners, these costs can be related to key storage, domain hosting, database hosting, and other variables; Administrative Costs – Beyond governance, these costs account for the long term environmental stability of the solution and consortium management; Infrastructure Costs – Computing and storage requirements can vary greatly based on the chosen system architecture that meets the unique business need; Operations and Maintenance – Support required to monitor the environment, ensure performance standards, and implement patches/corrective actions as needed;
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IT Support Work for Added Members – For public sector and other permissioned blockchain solutions, there may be development or configuration activities required to add a member and/or node to the network. Most of these costs are fixed, but the consortium needs to consider the implementation model best suited for their blockchain solution. Participants could choose to develop a per-participant model or consortium-wide model. The key consideration for this decision is based on the balance of transaction volumes across the participants. Although the per-participant model would shift some of the cost burdens directly to each participant and away from the consortium, such an arrangement could lead to higher network complexity and scalability issues. Alternatively, an environment that relies largely on the central operations of a consortium detracts from the benefits of a truly decentralized solution. Infrastructure costs are driven by the solution’s estimated transaction volume – the computing, active memory, and storage requirements determine the size and capacity of each. Current cost estimates in the United States are estimated at approximately $0.005 per transaction. These costs would vary from country to country based on the costs of cloud hosting, hardware, and electricity costs. It is also important to note that the consensus mechanism has a direct impact on the average per transaction cost as well.
3.2 CONSORTIUM Figure 15 – Consortium Example
Organizations are forming blockchain consortiums for various reasons. For example, Hyperledger, Ripple, and R3 have formed consortiums to establish new blockchain protocols and methodologies. Groups looking to establish a permissioned blockchain environment should follow a similar path to support a common business goal. A common goal for Georgian power market stakeholders, for instance, is to increase power provider access and decrease the time to clear and settle financial obligations in the market while providing an open audit trail to increase trust between the power providers and consumers. Establishing this common goal among consortium participants is required to establish a governance structure and ensure long term commitment from participants.
Why are Consortiums Important? Consortiums are necessary to align incentives for collaboration, outline Source: Deloitte roles and responsibilities throughout the network, and orchestrate and support the blockchain platform. With a shared environment comes shared responsibility and it is the role of the consortium to establish these ground rules and the cost model for the platform. The goal is to share the cost of doing business as opposed to maintaining duplicative systems, which not only drive up the indirect costs of doing business, but also drive audit complexity when the source of the truth of any transactional data element is in question. This report recommends developing a proof-of-concept as an illustrative tool that will facilitate stakeholder outreach, and the ability to share the vision of the Government of Georgia (GoG), establish buy-in, and ultimately form a consortium to define, develop, and manage a working prototype.
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4. SUITABILITY FOR BLOCKCHAIN IN THE GEORGIAN POWER MARKET Public and private organizations across several industries are investing heavily in blockchain in a variety of applications such as identity management, chain of custody, trade finance, clearing and settlement of financial transactions, and cross-border payments. While the technology can drive efficiency or reduce cost in each of these use cases, the blockchain and the smart contract coding that captures the business logic in each situation have certain inherent risks. It is imperative that implementing organizations understand these risks and the appropriate safeguards to fully realize the benefits of the technology. Figure 16 – Blockchain Readiness Framework
Using a blockchain readiness assessment framework of the type reflected in Figure 16, G4G’s analysis of the Georgian power market yielded a finding that the actors and institutions in the sector are uniquely positioned to form the first public-private partnership – or consortium – to apply blockchain technology in Georgia. The five key areas of the assessment reflect favorably on the industry vis a vis other economic sectors in the country. On balance, G4G’s engagement of power sector stakeholders revealed an industry that is relatively technologically advanced, has fully-formed operations and protocols, has a strong talent pool, and operates within a regulatory environment that prioritizes compliance. Despite the capacity of the power sector to adopt a blockchain Source: Deloitte solution, any technological adoption is characterized by unavoidable risks – those risks and a framework through which to assess and mitigate them are provided below.
4.1 RISK ANALYSIS Risks Figure 17 provides a risk assessment framework to facilitate the categorization and relative weighting of risks to be considered by a prospective consortium during the adoption and implementation of a blockchain solution. As the framework illustrates, risks can be classified into three categories: Standard risks Value transfer risks Smart contract risks Each risk category is described and detailed below.
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Figure 17 – Consortium Risk Assessment Framework
Source: Deloitte Standard Risks Blockchain technologies expose institutions to risks that are similar to those associated with current business processes but introduce nuances for which entities need to account. This baseline set of risks is detailed below. Strategic Risk: Organizations must evaluate whether they want to be at the leading edge of adoption or wait to adopt until the technology matures. Each alternative has varying levels of risks to business strategy. Separately, the peer-to-peer nature of this technology, it is important for entities to determine the right network to participate in, as their business strategy could be impacted by the different entities participating in the chain. The choice of the underlying platform could pose limitations in the services or products that can be delivered via the platform. Business Continuity Risk: Blockchains are generally resilient due to the multiple instances resulting from the distributed nature of the technology. However, the business processes built on blockchains could be vulnerable to technology and operational failures as well as cyber-attacks. Organizations should have a robust business continuity plan and governance framework to mitigate such risks. Additionally, blockchain solutions shorten the duration of many business strategy processes, and business continuity plans should account for shorter incident response and recovery time. Reputational Risk: Blockchain technology is part of the core operational infrastructure of an organization and will have to work seamlessly with existing software and applications. Failure to do so could result in poor customer experience and regulatory issues. Information Security Risk: While blockchain technology provides transaction security, it does not give account for wallet security. Meaning that, while the distributed database and the cryptographically sealed ledger prevent any corruption of data, a value stored in any individual account is still vulnerable if a user’s private key is compromised. Additionally, there are cybersecurity risks to the blockchain network if a malicious actor takes over 51 percent of the network nodes for any duration of time, especially in a closed permissioned framework. The nature of the technology, however, renders this “51 percent” feature an enhancement to business-as- usual cybersecurity risks to standard IT systems, given the multiple nodes that must be compromised, as opposed to one central system. Regulatory Risk: Since the technology is still in its infancy, there continues to be medium-term uncertainty concerning the regulatory requirements related to blockchain applications across industries. Additionally, there may be regulatory risks associated with each use case or the type of participants in the network. Such risks could also include cross-border regulations related to privacy and data protection. Given the ongoing integration of the Georgian power market into the EEC, this is a particularly acute risk.
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Operational and IT risks: Existing organizational standard operating policies and procedures will need to be updated to reflect new blockchain-enabled business processes. These technology concerns could include speed, scalability, and interface issues with existing information systems during the implementation of the technology. Contractual Risk: In operationalizing the technology, organizations will likely enter into several service-level agreements (SLAs) between participating nodes and the administrator of the network. Those organizations will likely also enter into SLAs with third-party service providers who will need to be monitored for compliance. Supplier risks: Organizations may be exposed to significant third-party risks if an application is sourced from external vendors. This risk is not fully unique to blockchain applications and external party risk mitigation best practices should be followed.
Value Transfer Risks Blockchain enables the peer-to-peer transfer of value without the need for a central intermediary. The value transferred could be assets, identity, or information – in the case of the Georgian power market, the value being transferred will likely include currency in exchange for the physical delivery of power. This new business model exposes the interacting parties to new risks which were previously managed by central intermediaries. Those risks include the following. Consensus Protocol Risk: The transfer of value in a blockchain framework occurs by the use of a cryptographic protocol that drives consensus among participant nodes when updating the blockchain ledger. Several such cryptographic protocols are used to achieve consensus among participant nodes for updating the blockchain ledger. The costs and benefits of each such protocol will have to be evaluated within the context of the use case and network participant requirements. Key Management Risk: While the consensus protocol irreversibly seals a blockchain ledger and renders the corruption or alteration of past transactions impossible, the ledger is still susceptible to the theft “private keys” – or individualized access rights – and the takeover of assets associated with public addresses. Digital assets could become irretrievable in the case of accidental loss or private key theft, especially given the lack of a single controller or a potential escalation point within the framework. Data Confidentiality Risk: The consensus protocol requires that all participants in the framework can view transactions appended to the ledger. While the transactions in a permissioned network can be stored in a hashed format so as not to reveal the contents, specific metadata may always be available to network participants. Monitoring the metadata can reveal information on the type of activity and the volume associated with the activity of any public address on the blockchain framework to any participant node.
Smart Contract Risk Smart contract applications can potentially encode complex business, financial, and legal arrangements on the blockchain, and that could result in the risk associated with the attempt to create a one-to-one mapping of these arrangements from the physical to the digital environment. Additionally, cybersecurity risks increase as the smart contracts rely on oracles outside the blockchain platform to trigger the execution of a contract. Business and Regulatory Risks: Smart Contracts should accurately represent business, economic, and legal arrangements defined between parties in the framework. The smart contracts that are defined on a blockchain network will apply consistently to all participants across the network. Therefore, these smart contracts will have to be capable of handling exceptions, and the consequences of these exceptions in the form of a programmatic output on the blockchain. This function will have to be tested across the universe of all other smart contracts within the network for adherence to business and legal arrangements and compliance with regulations. Contract Enforcement: Currently there is no legal precedent covering the enforcement of a smart contract as opposed to a physical contract, and there are similarly no regulations that govern smart contracts. Also, as the data on a blockchain framework is immutable, organizations should take care to amend smart contracts to avoid breaches of existing regulation by acting on data from the past on the blockchain that are not within the statutory legal limits for a financial arrangement.
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Legal Liability: In a permissioned network, the legal liability remains unclear for an improper, erroneous, or a malicious administration of a smart contract resulting in a transaction with two or more entities on the network, causing assets to leave the network via those transacting entities. Information Security Risks: Smart contracts may be susceptible to security breaches and improper administration. Participant entities or the network administrator will need strong governance and change control processes to deploy new or amend existing smart contracts. They will also need a robust incident management processes to identify and respond to errors in smart contract operations. Oracle-Related Risks: Oracles are entities that exist outside the blockchain environment but feed data to the network, which could trigger the execution of the smart contracts within the network. If these external data sources are subject to malicious attacks, they may corrupt the data being fed to the blockchain.
4.2 THE POLICY LANDSCAPE International Policy Approaches There is an active global dialogue centered on how to regulate blockchain and the transactions it can streamline. The prevailing concerns relate to cryptocurrency applications, as many digital currencies have been created and exchanged during the last decade, bypassing central monetary authorities. Blockchain, however, is more than cryptocurrency, and various industries could take advantage of blockchain while achieving operational efficiency, sustainability, and business model transformation. Different jurisdictions have instituted various initiatives and approaches to new legislation and/or regulations addressing blockchain based environments. A notional categorization of policy approaches is described below. Study-Wait-See: Most jurisdictions are taking a near-term observational approach to how blockchain is reshaping new business models in various industries. Regulators in these jurisdictions are simply trying to understand blockchain’s potential and determine future social and economic implications on a macro and micro level. Georgian regulators are in a stage of observation and have not yet implemented concrete policy governing the use of the technology. The lack of clear policy and guidance could send poor signals to new industry players willing to shift to new business models, and as such these jurisdictions should emphasize regulatory clarity that reflects incentives for market players to create innovative business models.
Introducing New Regulatory Frameworks: While there is no global standard or generally accepted terminology associated with blockchain, some countries have adopted new regulations. France, for example, explicitly permits the crowdfunding of record keeping on blockchain; Russia and China have adopted policies that govern Initial Coin Offerings (ICO); and some states in the US have enacted local laws on smart contracts, such as blockchain-based digital signatures, and have ruled on the legal admissibility of blockchain ledgers as evidence. Still, global acceptance of this technology and the standardization of policy approaches will need to evolve to avoid legal confusion on a local, national, or international level.
Guidance and Sandboxing: Some of the more advanced jurisdictions have provided regulatory guidance on how governments should apply legal frameworks to foster new technologies through “sandboxing” opportunities. Sandboxing refers to the testing prototypes that use new technologies in a safe environment that is exempt from certain restrictions. Developers create these prototypes on a limited scale and duration under close supervision. An instance of this type of sandboxing activity includes UK developers’ experience with the creation of FinTech products involving the use of blockchain. Similar approaches have been executed in Canada, Australia, Singapore, Switzerland, and Luxembourg.
Applicable Laws and Regulations in the Georgian Power Market A full-scale production level application of blockchain in the Georgian power market will have to navigate an evolving set of international and local laws, regulations, and standards that will impact the parameters of the solution. Given that Georgia is engaged in an ongoing effort to integrate with the EEC, the EU’s policy environment concerning blockchain particularly looms large. The relevant international and local policy contexts are detailed below.
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The International Policy Context – The EU The EU is accelerating blockchain development across member states and providing political and financial support to explore opportunities across industries. Since April 2018, 26 Member States plus Norway and Liechtenstein agreed to sign a declaration creating the European Blockchain Partnership (EBP). These countries have also cooperated in the establishment of the European Blockchain Services Infrastructure (EBSI). Within this cooperative effort, the EU has established the International Association for Trusted Blockchain Applications (INATBA), whose primary goals are the following: 1. Maintain a permanent and constructive dialogue with public authorities and regulators that will contribute to the convergence of regulatory approaches to blockchain and other distributed ledger technology globally. 2. Promote an open, transparent, and inclusive global model of governance for blockchain and other distributed ledger technology infrastructures and applications. A model that reflects the shared interests of stakeholders from industry, start-ups and SMEs, civil society organizations, governments, and international organizations. 3. Support the development and adoption of interoperability guidelines, specifications, and global standards, to enhance trusted, traceable, user-centric digital services. Upholding an open, transparent, and inclusive method of multi-stakeholder cooperation. 4. Develop sector-specific guidelines and specifications for the development and acceleration of trusted sectorial blockchain and DLT applications in specific sectors (i.e., financial services, health, supply chain, energy, and financial inclusion). So far, the EU has allocated EUR 83 million to blockchain related projects, and it could potentially commit up to EUR 340 million between 2018 and 2020.
Discrete Applicable EU Regulations As a signatory of the EU Association Agreement, Georgia committed to harmonizing its local legislation to EU requirements. Since blockchain nascent technology, no specific legislation exists to regulate business operations performed via a blockchain. Notwithstanding the evolving landscape, the following EU regulations should be considered when implementing a blockchain solution: Regulation (EU) No. 910/2014 – eIDAS: The Electronic Identification and Trust Services (eIDAS) Regulation is a European regulation that establishes a common legal framework for trust services and means of electronic identification in the European Union. The Regulation aims to enhance trust in electronic transactions between businesses, citizens, and public authorities by providing a common legal framework for the cross-border recognition of electronic identification and consistent rules on trust services across the EU. One of the objectives of eIDAS is to create an internal market for trust services, granting them the same legality as traditional paper-based processes.
Of particular note for a blockchain solution is the provision of the regulation related to electronic signatures and electronic seals. eIDAS introduced Electronic Seals as a solution for legal entities, allowing them to protect the authenticity and integrity of electronic documents and data. A seal can be considered an electronic signature for a business or organization. In other words, the main difference between a seal and a signature is that a signature is meant for individuals / natural persons, whereas a seal is used by a legal entity (business or organization) and can be used by more than one person or system within the legal body. Examples would be invoices, which are automatically generated by an accounting system or signed messages sent by a sensor in the Internet of Things (IoT) – such as what would be envisioned in a solution that uses smart meters for critical inputs.
Another central aspect of eIDAS applicable to blockchain solutions is a qualified electronic time stamp. A qualified electronic time stamp is an electronic time stamp that complies with specific requirements that are established in article 42:
o Links the date and time with the data so that the possibility of modifying the data without being detected is reasonably eliminated; o Is based on a temporary information source linked to Coordinated Universal Time;
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o Has been signed using an advanced electronic signature or stamped with a superior electronic stamp of the provider of qualified trust services or by an equivalent method.
Regulation (EU) No. 2016/679 - GDPR: In April 2016, the European Parliament adopted the General Data Protection Regulation (GDPR) to replace the outdated data protection directive of 1995. GDPR contains provisions that require businesses to protect the personal data and privacy of EU citizens for transactions that occur within EU member states. GDPR also regulates the exportation of personal data outside the EU. GDPR applies to any file or database that has a person’s name or an ID in it. As it pertains to a power market solution in Georgia, the application of blockchain technology might facilitate compliance with GDPR. As this report suggests, a permissioned blockchain network predicated on private keys and hashes can enhance the privacy of data elements in the blockchain. Local Governing Authorities and Applicable Local Policies PSDA: The Public Service Development Agency (PSDA) is a Trust Service Provider in Georgia managed by the Ministry of Justice that issues certificates and provides other public services. PSDA provides the following general-purpose public rights, permits, and information concerning technological online solutions: o Time-stamping services o Certificates for digital signature o Digital seal certificates o Authentication certificates o Encryption certificates for biometric data
DEA: Another relevant governing agency under the management of the Ministry of Justice is the Data Exchange Agency (DEA). DEA's overall activity covers several functions, which include the development of e-governance, the creation and installation of a unified Georgian Governmental Gateway (3G), the establishment of data exchange infrastructure, setting ICT standards for public sector entities, and elaborating information security policies. Law of Georgia on Electronic Documents and Electronic Trusted Services: This law establishes a legal framework for electronic documents, the use of electronic signatures, and the use of trusted electronic services. Law of Georgia on Information Security: The purpose of this law is to facilitate effective and efficient enforcement of information security, provide information security rights and obligations in public and private sector, and define state control mechanisms for implementation of information security policy. The Law on Payment Systems and Payment Services: This Law aims to promote the safe, sustainable, and effective functioning of payment systems in Georgia. This Law defines the principles of regulation and supervision of payment systems and payment services, as well as matters relating to the application of financial collateral.
4.3 STAKEHOLDER LANDSCAPE Power delivery in Georgia consists of multiple key stakeholders, five of which the report covers in this section. The stakeholders outlined here comprise the transmission system operator, the single market operator, the government ministry charged with energy policy, the market regulator, and lastly, an industry association representing renewable energy producers – a critical stakeholder as the prevailing source of electricity in Georgia is hydroelectricity. Each of these entities is outlined immediately below. Georgian State Electrosystem (GSE) The Electricity System Commercial Operator (ESCO) The Georgian Ministry of Economy and Sustainable Development (MoESD) The Georgian National Energy and Water Supply Regulatory Commission (GNERC)
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The Georgian Renewable Energy Development Association (GREDA) In preparation for the development of this report, the G4G team conducted several rounds of interviews, fact- finding discussions, and presented general blockchain concepts and use cases to the stakeholders. This was an attempt to understand the interest in deploying a blockchain solution in the Georgian power sector, and more importantly, which stakeholder might be an ideal advocate of any developed solution, and had the key competencies and the awareness necessary to lead development efforts. The G4G team, pursuant to these meetings, developed a framework to assess the relative “blockchain readiness” of each institution. This was based first on determining the “organizational readiness” of the entity, and secondly through a determination of whether a blockchain platform would have a measurable impact on that organization’s operations. Below, the report provides a high-level description of each organization’s role in the power sector, followed by the G4G team’s assessment of the organization’s “blockchain readiness.” GSE GSE is a state-owned company that acts as the sector’s transmission system operator (TSO), meaning that it provides transmission, dispatch, and metering services to all wholesale market participants. The organization controls the entire country’s power system to ensure the availability of the system for uninterrupted and reliable power supply; and transfers, without the right of purchase or sale, the electricity imported or generated in Georgia to distribution companies, direct customers, or the power systems of neighboring countries Blockchain Readiness – G4G’s conversations with GSE yielded a finding from the team that, from an organizational readiness perspective, it was not very aware of the technology, and that there was little certainty of its mission in the future state of the market. From an organizational impact perspective, GSE’s current mission – metering and fundamental grid operations – did not directly fit with the types of capabilities a blockchain solution is intended to facilitate, at least in the near term. ESCO ESCO acts as the Georgian power market’s single market operator. As described in section 2.1, ESCO essentially operates the financial elements of the market, as opposed to GSE, which is primarily concerned with the physical and technical elements of power delivery. In the current state of the market, ESCO obtains meter readings from GSE each month, determines to what extent bilateral power contract counterparties were dependent on the balancing market ESCO maintains, and then invoices customers depending on their balancing market consumption. ESCO makes payments to balancing market producers at a fixed period after this reconciliation process. Blockchain Readiness – the G4G team found that ESCO’s operations presented a good use case for the adoption of a blockchain solution since its settlement process seemed to suffer from long cycle times, low transparency, and high counterparty risk. From an organizational readiness perspective, however, G4G found that the awareness of the technology was low, software development staff was not a hiring priority, and that their mission in the future state of the market was as yet unclear. MoESD MoESD’s mission is to regulate economic activity in Georgia. It is the successor organization for the former Ministry of Energy, which the Prime Minister abolished as part of his reform plan in 2017. So in addition to the tasks entailed in regulating economic activity, MoESD also focuses on improving and modernizing the country’s electricity supply; the renovation of existing and construction of new power stations; the development of alternative energy sources; and improvements of the country’s power infrastructure. The preceding tasks include long-term planning for the sector and establishing the sector-wide policy. MoESD, for instance, as has been covered in section 2.1, is responsible for adopting the Concept. Blockchain Readiness – given the policymaking and long-term planning focus of the organization, MoESD presents a weak use case for a blockchain solution. That said, from a planning perspective, its advocacy of the technology could prove quite persuasive and effective. It is noteworthy that the organization seemed extremely receptive to exploring the technology, and was staffed with a relatively high proportion of technically adept personnel. GNERC GNERC is the energy market regulator in Georgia. Its mission, among other elements, is to promote the development of the energy sector, to balance consumers’ and regulated companies’ interests in the effective regulation of the sector; and to implement transparency standards and independence in the tariff setting
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process. Among GNERC’s key functions in the country’s current wholesale power market operations, is to conduct periodic audits of energy market participants, to ensure, among other things, maintaining minimal levels of availability in the balancing market, and to ensure appropriate payments are collected and made from ESCO. Blockchain Readiness – GNERC’s compliance and auditing function is an operation that presents an appealing use case for a blockchain solution. This is especially so, given the prevalence of blockchain pilots in such compliance functions – where regulated entities make available to the regulator compliance-related information on a blockchain (see the case study on RegChain in section 2.3). The resulting configuration reduces the reporting burden on regulated entities and allows regulators full transparency and the ability to pull their own reports. That said, GNERC was staffed very lightly with technical/software development staff, and the use case was not ideal – i.e., the organization was not very transactional, relying instead on episodic audits. GREDA GREDA is an industrial association that advocates on behalf of its member renewable energy producers and focuses on improving the investment climate for renewable energy businesses in Georgia. Its primary scope revolves around the sellers in the Georgian wholesale power marketplace. The sellers in the Georgian marketplace are also the entities most affected by the current structure, as they are required to provide power at risk, only to await payment that can arrive up to 55 days after operation and power deliveries. Blockchain Readiness – of the stakeholders with whom G4G consulted, GREDA was by far the most organizationally ready entity. They are staffed with personnel that have deep familiarity with blockchain and have software development skills. They had been advocating for such a solution even before any conversations with the G4G team. Most importantly, their use case was particularly strong, given the disproportionate impact from the flaws in the existing settlement mechanism in the market felt by GREDA’s members. Readiness Analysis Given the above assessment of each stakeholder, this report maps the fit of a blockchain solution to the entities. As can be seen from the mapping exercise at Figure 18, G4G found GREDA to be the most well- situated to adopt a blockchain solution, assist in its development, and be its chief champion in the region.
Figure 18 – Blockchain Solution Readiness Framework
WORTH EXPLORING IDEAL ADVOCATE
COST > BENEFIT QUICK WIN
Source: Deloitte
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Based on the initial stakeholder assessments performed by the G4G team, there are two relatively mature use cases for blockchain technology that the Georgian power market could explore. This report primarily discusses the benefits of a clearing and settlement application in the foregoing pages, but there is an alternative blockchain solution that is currently in proof of concept phase and could be of interest to GNERC. As can be seen in the readiness framework illustrated in Figure 18, while the member power producers that comprise GREDA do present the strongest case for focusing on a clearing and settlement application, GNERC presents the next-strongest case for a tailored application – particularly in the regulatory context. The box below, discussing the “RegChain” application discusses how such a solution might be deployed to facilitate GNERC’s regulatory responsibilities.
RegChain The current environment in the Georgian power market, characterized by regulated power plants, PPAs, and standby power requirements, has created a long regulatory tail. Post-settlement, GNERC performs audits on the power providers such that power consumers can receive assurance that they are paying a fair, cost- reflective rate for electricity. In some cases, GNERC has identified balancing market plants which have received payments but have not complied with necessary availability requirements. Power availability is a key term within balancing market PPAs, and if it is not met, providers are subject to contractual penalties and a reduction in payments. The current process for identifying these contractual breaches is after the fact, vulnerable to poor documentation, and requires additional effort from both the regulator and regulated entities. To address a similar circumstance, Irish-domiciled money market and other investment funds and their regulators explored a proof of concept establishing a blockchain for their regulatory reporting and regulatory execution functions. They chose blockchain as the enabling technology due to the following key factors: 1) Data integrity – Once a transaction is written to a blockchain, it becomes immutable. Any changes to reportable data are tracked as a part of the technology’s native capability – without the need to code and account for audit logs and read/write permissions. 2) Storage and Speed – Blockchain provides near real-time updates for data across the entire network to facilitate quicker data sharing and access. Traditional models include APIs, batch processing, and/or expensive B2B interfaces. Even more rudimentary models could include printed and mailed reports and/or emails with attachments. 3) Analytics – Blockchain can provide a member of the network a trusted source of truth streamlining development and O&M activities. With these as motivating factors, a team of software coders developed a proof of concept that focused on capturing and storing key information from the regulated entity, allowing for more streamlined audits and pointed discussions. This baseline solution can be enhanced into the future leveraging new disruptive technologies like IoT and process robotics. A RegChain solution in the power market could capture reporting requirements from the power providers and leverage other key inputs from GSE and ESCO to build a smart contract mechanism for automated reviews to flag discrepancies between transmission data, the future DAM, and what power providers report.
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5. RECOMMENDATIONS AND NEXT STEPS Blockchain may be an emerging technology, but Georgia has demonstrated its abilities through its open government initiatives and IT solutions that it is more than capable and flexible enough to continue its growth as a leader in innovative solutions. 5.1 RECOMMENDATIONS TO GEORGIAN GOVERNMENT Areas for Investment The levels and areas for investment largely depend on the amount of development and hosting (e.g., cloud storage) the GoG prefers to do in-house versus through outsourcing. Typically, governments deploying technological solutions focus on being process experts where they understand the operating environment and key business rules while outsourcing the actual software development. This allows government officials to maintain the solution though staff augmentation and/or developing the required skills during the development phases with a transition period after a contractor delivers the final product. Considering the geopolitical environment and the desire to reduce governmental bureaucracy, foster innovation, and develop the technical capabilities of Georgian citizens, this report recommends that the state, parastatal, and private organizations comprising the Georgian power sector form some permutation of a public-private partnership, and determine areas where the government can influence the private sector through public funding and investment. People Georgian state universities and trade schools should continue to invest in computer sciences and information system management. It is important to note that although systems engineers and business-minded professionals are vital to build and maintain core business solutions, like blockchain applications, there are opportunities to offer technical training for some of the coding language and infrastructure skills necessary as discussed above. Blockchain is constantly evolving with new protocols and capabilities. However, there are several technical and functional skills that are universal for all IT projects that also hold true for blockchain implementations, including: Project champions who set clear objectives Project managers who can manage both stakeholders and development teams Full stack developers Solution Architects DevOps Infrastructure and Security It is the job of the blockchain consortium to understand the talent mix available and create a sustainable mix of internal and contracted members of the team. If the government is participating in a blockchain solution, the government should take steps to develop internal talent to be able to own their node and private keys for the protection of consumer and business data. In the event the GoG pursues a solution like RegChain, for instance, organizations would be sending encrypted information to the government, which can only be decrypted through the use of their private key. If that private key were to be obtained and shared, sensitive information would be at risk. Processes The GoG should establish its technology strategies, including processes that dictate how to identify and incubate potential blockchain solutions. These processes and support environments are typically hosted in so- called “innovation centers” in governments and their respective agencies. Considering blockchains are typically developed through Agile methodologies, it would be beneficial to the technology leads who will be serving as product and process owners to be familiar with Scrum and SAFe methodologies. The GoG should also consider incorporating these methodologies into their in-house development efforts – so when there are opportunities for public/private partnerships to co-develop software, the key stakeholders have a baseline understanding of development methodologies and can focus on a solution as opposed to a method of delivery.
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The nature of blockchains is that their need is born through solving shared problems through collaboration. It would benefit the GoG to establish its own blockchain center of excellence to help facilitate public-private dialogue in support of determining the viability of blockchain efforts, helping the key stakeholders take the initial steps to form a consortium, and possibly provide some initial support through grants or other means. Technology Key considerations for developing a blockchain application and ensuring its viability rely on very basic assumptions such as internet connectivity and a stable power grid. Although there may be some geographic areas within Georgia that lack basic access to electricity and internet connectivity, the majority of the country can support the most basic requirements of a blockchain solution. However, Georgia should continue to invest in broadband and 5g capabilities, which would improve the reliability of IoT connected devices and timeliness of transaction posting. As discussed above, although the specific coding languages for blockchain solutions are as varied as the business process issue they are trying to solve, one key advantage to implementing blockchain technologies is that it is meant to fit into a larger architecture which leverages widely used, existing technologies. Georgia’s readiness to adopt blockchain solutions is demonstrated in the fact that it already has organizations like the Ministry of Justice, which provide software and data hosting services to other parts of government, and the Ministry of Finance, which provides developer talent. These developers have already proven their ability through a land registry effort where they learned and developed software to perform Merkel Tree Hashing. Most of the development around blockchain typically isn’t specific to the blockchain itself but rather to the supporting technologies. In a power market prototype, such common languages and protocols as React, HTML5, CSS3, and NodeJS could be used. Highly specialized blockchain developers should be leveraged early in the process for architectural considerations and initial development to establish the blockchain solution. The rest of the team can apply their current skills to develop interfaces, front end visualization, and backend storage for “off-chain” data. Also, smart contracts do not typically use a proprietary coding language but varies depending on the base DLT protocols leveraged in the solution. From a private market perspective, the Georgian economy has several businesses who are demonstrating core blockchain development and other key technical capabilities such as cloud hosting. Leading Practices in Establishing and Managing Consortiums VAKT is an interesting use case. As this report discussed in section 2.3, in identifying a shared solution to their common problem around energy trading settlement, the stakeholders were able to quickly develop a shared set of guiding principles, use case identification, and solution prioritization. Early on, they realized that not only would the software help their individual businesses operate more efficiently, but that the consortium itself could become a self-funded organization at some point in the future – as long as it defined its service delivery model and identified its key market. Since going live with its initial technical solution, additional organizations have vocalized interest in joining VAKT, allowing the organization to capitalize on growing the network. Before a blockchain solution can become a reality, a consortium must be established. After all, what is the point of a distributed marketplace if it is not a part of a larger community? To date, only GREDA and ESCO have expressed an explicit desire for a blockchain solution to be incorporated into the future-state market. Going forward, any solution would need an influential advocate – one who is capable of coalition building and understanding the unique nature of this dynamic marketplace. They will need to identify the core leaders to establish procedures and primary application hosts to ensure a strong operating environment that empowers stakeholders. Figure 19 outlines some of the foregoing considerations in consortium management and provides a framework through which view arranging the consortium.
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Figure 19 – Key Considerations in Consortium Management
Source: Deloitte
Once the key members of the consortium are identified, the organization should begin to determine the structure of the organization and ensure the best interest of the consortium are realized. As the legal entity is established, it could be staffed with members of the founding organizations or independent third parties. The VAKT consortium, for instance, decided to leverage a third party to serve as an independent Consortium Management Office to facilitate meetings, document key decisions, and manage development efforts.
5.2 DEFINE TRANSFORMATIONAL ROADMAP Agile methodologies are ideal for implementing blockchain solutions due to the speed at which the technology continues to improve. Following a traditional, or “waterfall,” method would result in outdated protocols at the time of deployment. In some cases, continuous changes to technical design could lead to being in a constant state of development. As discussed earlier in this report, blockchain is an exponential technology, meaning its capabilities are growing daily with new use cases, applications, protocols, and patents. As such, this report recommends that the appropriate Georgian stakeholders follow an Agile methodology. Figure 20 provides a conceptual roadmap framework that illustrates what a typical deployment of technology like blockchain entails. The subsections that follow detail the implementation phases shown in Figure 20. Discovery Hosting a blockchain lab is the starting point of the ideation process. It is important to assess the as-is business process(es) and define gaps. As is the case with other technologies, applying the wrong combination of people, process, and technology to a problem will not yield the desired results. In some cases, this journey may not determine a blockchain solution to be the best option. Blockchain should be leveraged as any other software solution. One benefit of a blockchain solution is its ability to integrate seamlessly into other existing technologies. There are, for instance, many use cases where source data exists in enterprise resource planning (ERP) platforms such as Oracle and SAP. In the case of RegChain, the solution compiles source data from various systems across the organization into a single report prior that is sent to a regulator for review in near real time.
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Figure 20 – Blockchain Implementation Roadmap Framework
Source: Deloitte
After a consortium is formed, the group should revisit the results from the lab to have new discussions about what problems exist in the current state, as well as problems other countries or systems face in their clearing and settling process. Labs should be iterative and often occur to ensure the newest capabilities are being leveraged and problems are addressed swiftly. The G4G team that explored the potential for a blockchain application had a narrow focus throughout its discovery phase due to scope and timing constraints – as such, the team arrived at a small but achievable use case – the settlement function within a notional DAM. While the consortium should follow a similar practical approach, they should not confine themselves with similar scope constraints. For example, there are opportunities to expand a narrow solution beyond recording a ledger for settlement, toward opportunities to include automated clearance of the day-ahead market and integration into the intraday market. The operative slogan for the lab facilitator should be “Think big, really big, and then start small, really small.” The purpose of this mentality is to envision a potential blockchain end state but to ensure a small enough scale to register a “quick win” as the technology continues to mature. Hosting a blockchain lab is broken down into three segments: 1) Establish a base level of understanding of blockchain through engaging in thoughtful conversation about its capabilities and benefits to governments and businesses. 2) Understanding of the current business processes, existing problem statements, and key stakeholders. 3) Assess the potential use cases against the framework identified above to identify the best opportunity for success. Proof of Concept Initial proofs of concept should be lean, yet begin with an end-state in mind. Considerations for the system architecture are based on the “big ideas” discussed in the lab and are captured in Figure 21.
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Figure 21 – System Architecture Options and Considerations
Source: Deloitte Engage and Adopt Establish Consortium As discussed in depth in section 3.2, the inflection point for implementing a permissioned blockchain solution is the establishment of the consortium. In that section, the report covered several risk factors and criteria for consortium success. At the root of any blockchain solution, is the community that resolves to work together. While key stakeholders in the Georgian power market have to date been involved in identifying high-level goals and objectives – going forward, there needs to be a more active level of commitment. To help mitigate the risks above, the stakeholders should collaborate and establish a Memorandum of Understanding (MOU) to serve as the first step in establishing a consortium. At a minimum, the MOU should include: Goals of Collaboration: Establish an energy trading platform in support of open government initiatives acceptable to EU power market trading agreements; Scope of the Engagement: Identify key milestones to include aspects of the future state business process that blockchain should address; Value Proposition: Georgia desires to be able to openly trade on the EU market, and therefore, must transition from a regulated to deregulated power market model. Blockchain provides the opportunity to develop an open, near real-time process, which will shorten the time between production and settlement from what currently takes 45 days and is highly manual; Organization of Collaboration: Set operational norms and identify rules for facilitation as well as an optimal resource mix; Organization Commitment: Identification of key resources in support of the scope defined above; Intellectual Property: Define who will retain the rights to the developed blockchain solution; Investment: Define expectations for funding. This could include grants from governments, banks, etc; Data Sharing: Organizations should determine data that will be shared on the blockchain, which directly support the success of the solution; Operational Impacts: The organizations should support their respective commitments and agree upon change management strategies in support of the consortium within their organizations; Confidentiality: Press releases and communications to external organizations should consider data privacy rules and should be agreed upon by the consortium;
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Duration: This MOU should serve an initial step toward establishing a formal consortium. Setting goals and objectives should be limited in scope and have a proper timeline so all organizations involved have a clear understanding of the commitment required. Develop Minimally Viable Ecosystem (MVE) GREDA and ESCO will be assuming ownership of a proof of concept developed by the G4G team and will be responsible for establishing an environment to host it. In its current form, there is no need to expand the current architecture, but once the consortium is formed and additional functionality is identified and funded, the environment should be expanded to support it. The key environmental elements required for a successful pilot phase include the following: A small consortium with the representation of each role necessary to complete the set of use cases that make the solution viable in the marketplace; . For intellectual property (IP) Management, the MVE includes at least one IP owner, IP licensee, IP authority, identity manager, and platform (contracts, applications, and network) Provider; . Defining a MVE focuses capability development to a select set of use cases and targets outreach/marketing efforts to specific entities; . Building a MVE enables the group of stakeholders to prove the value and concepts of the given use cases on a blockchain consortium platform. Distributing cost amongst the group, this provides low-risk learning opportunities for the participants to explore and expand the technology. Pilot The prototype the G4G team developed in support of this effort is not ready to be piloted. GREDA, ESCO, and other key power sector stakeholders will need to decide what additional functionality needs to be built into the solution, such that the value of the solution is self-evident. In considering this additional functionality, costs could prove a major constraint, as more functionality could have exponential impacts on hosting requirements. For example, the current G4G prototype is based on a single daily clearing price to greatly reduce the transaction volume and therefore the size of the environment. Switching to an hourly clearance model, one that properly reflects the future state, would be more accurate, but it would increase the transaction volume by a factor of 24. This would mean 23 additional daily clearing prices, 23 additional daily smart contracts per power producer, and 23 more meter readings per power producer. GREDA, ESCO, and other key sector stakeholders may also find it beneficial to build a fully automated blockchain solution that covers the full end-to-end clearing and settlement process. This expanded solution would include, for instance: 1) Removing post-market-clearing data entry step currently required in the prototype; 2) Providing the capability to input the required power in MWh for the DAM; 3) Providing the capability for power providers to input their bid price; 4) Developing an algorithm to set a clearing price. Additionally, the prospective consortium could perform feasibility studies to pilot smart meters and explore their capabilities. The company Riddle&Code, for instance, worked with Deloitte to produce a blockchain-enabled smart meter for both power consumption and production – Figure 22 illustrates the smart meter blockchain- enabled operations. Although the graphic and underlying innovation from Riddle&Code represents a slight variation of the prototype developed by the G4G team, the mechanism of using a “crypto-tag” to authenticate and ensure the validity of smart meter data would be similar.
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Figure 22 – Riddle&Code Smart Meter Technology
Source: Riddle&Code
Within three to four additional iterations (termed “sprints” in agile project development terminology), the current prototype could realistically be ready for a full pilot assuming a finite number of power providers and using a notional daily market at relatively low costs. Institutionalize The long-term success of the consortium is fundamentally tied to the acceptance of and participation in the consortium by all key power sector stakeholders. Primarily, the future state market operator and transmission service operators would need to accept this solution. There are inherent risks within the current state operations at both GSE and ESCO as they work to formalize the future state market. This is an opportunity to develop both the process and technology in concert as they design a process that meets the needs of the Georgian Power Markets and the requirements set forth by the EEC. 5.3 A NOTIONAL EXAMPLE OF THE FUTURE This report has covered in depth the market, the technology, where to start and invest, and provided the G4G has produced a prototype based on a simplified model of the to-be state of the energy market. This section also introduces and emphasizes the benefits of using a creating a technological solution built on an agile principle – one which begins with the end in mind yet dissects delivery into small segments that each provide value. There is as yet no full end-to-end blockchain software solution in the market – and this fact may prove either a challenge or an opportunity. That said, through many pilot-stage efforts in a variety of operational contexts, blockchain has proven its usefulness. VAKT and Enerchain – two organizations discussed in section 2.3 – have already put two applications in production over high-risk complex processes in energy markets. Similarly, the G4G team, in six weeks, took a concept for using blockchain to automate settlements and produced a prototype. Figure 23 – Notional Future State Power System Powered by Blockchain
Source: Deloitte USAID | GOVERNING FOR GROWTH (G4G) IN GEORGIA BLOCKCHAIN: AN ENABLER FOR POWER MARKET OPERATIONS 42
How blockchain will continue to disrupt the power sector is yet to be seen. However, the path illustrated in Figure 23 is one of vision of a future-state power market – one fully governed by a blockchain system; from power generation, to consumption and everything in between. Georgia is ready to develop key aspects of this potential system architecture already. The center section of the Figure 23 illustration – covering strictly grid operations – is currently under review for a technological solution (either through a blockchain or non- blockchain option). There is, moreover, an immediate need to establish a mechanism for peer-to-peer electricity trading on a DAM. Blockchain can provide this capability. Meanwhile VAKT and Enerchain have mature solutions that can serve as a guide to Georgia as the power sector explores future development. Although blockchain applications are not yet mature enough to implement the full vision in Figure 23, new capabilities are being discovered daily. By developing a long-term strategy which includes emerging technologies, the processes that the Georgian power sector stakeholders define today will be able to change at the speed of the market. The key to being successful is taking the appropriate calculated risks in areas where emerging technologies have proven their value. This report does not suggest that blockchain replace an entire organization’s operations, rather, it does advocate the replacement of the portions of organizations that are currently lagging in communication and sharing information across the market place. The Georgian power market is a simple consortium away from creating the future of power trading.
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6. REPORT REFERENCES
Deloitte.2018. IoT powered by Blockchiain – How Blockchains facilitate the applications of digital twins in IoT. Deloitte Blockchain Institute. https://www2.deloitte.com/content/dam/Deloitte/de/Documents/Innovation/IoT- powered-by-Blockchain-Deloitte.pdf
Deloitte. 2018. Blockchain: A technical primer. Deloitte Insights. https://www2.deloitte.com/insights/us/en/topics/emerging-technologies/blockchain-technical-primer.html. Enerchain. Accessed: January 2019. Enerchain Home Page. Enerchain. https://enerchain.ponton.de/. European Energy Community (EEC). 2017. Energy Governance in Georgia: Report on Compliance with the Energy Community Acquis. Energy Community Secretariat. https://www.energy- community.org/dam/jcr:12607648-d848-4920-b560-82d648f95a39/ECS_Georgia_Report_082017.pdf. LO3 Energy. Accessed: January 2019. LO3 Energy Home Page. LO3 Energy. https://lo3energy.com/ Riddle&Code. Accessed: January 2019. Smart Energy. Riddle&Code. https://www.riddleandcode.com/smart- energy Rowley, J. 2018. With At Least $1.3 Billion Invested Globally In 2018, VC Funding For Blockchain Blows Past 2017 Totals. Crunchbase News. https://news.crunchbase.com/news/with-at-least-1-3-billion-invested-globally- in-2018-vc-funding-for-blockchain-blows-past-2017-totals/. VAKT. Accessed: January 2019. VAKT Home Page. VAKT. https://www.vakt.com/.
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APPENDIX A: MARKET REFORM SCENARIO WITH ANNUAL COST OF MONEY
Comparison of Potential Cash Savings Blockchain Settlement vs ESCO & DAM Settlement
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total GEL Total USD GEL
Current State Settlement 191,175.26 ₾ 178,064.85 ₾ 167,649.66 ₾ 116,190.86 ₾ 56,217.51 ₾ 29,841.71 ₾ 29,743.41 ₾ 102,769.89 ₾ 138,888.47 ₾ 219,471.08 ₾ 223,865.28 ₾ 237,998.35 ₾ 1,691,876.31 ₾ $ 667,526
Day Ahead Settlement 6,951.73 ₾ 6,475.00 ₾ 6,096.27 ₾ 4,225.07 ₾ 2,044.25 ₾ 1,085.14 ₾ 1,081.56 ₾ 3,737.04 ₾ 5,050.42 ₾ 7,980.66 ₾ 8,140.45 ₾ 8,654.37 ₾ 61,521.96 ₾ $ 24,273 Blockchain Settlement 3,475.87 ₾ 3,237.50 ₾ 3,048.13 ₾ 2,112.53 ₾ 1,022.12 ₾ 542.57 ₾ 540.78 ₾ 1,868.52 ₾ 2,525.21 ₾ 3,990.33 ₾ 4,070.22 ₾ 4,327.18 ₾ 30,760.97 ₾ $ 12,137
Assumptions (ESCO Balancing Market Data)
2018 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Balancig Power 307,200,000 252,400,000 282,100,000 190,600,000 87,200,000 46,800,000 68,700,000 178,300,000 238,000,000 321,500,000 322,800,000 348,600,000 kWh Price 0.128 0.131 0.122 0.121 0.133 0.127 0.089 0.119 0.116 0.140 0.138 0.140 GEL/kWh Balancing Market Turnover 39,333,030 33,090,265 34,492,795 23,134,346 11,566,376 5,941,676 6,119,507 21,144,217 27,653,587 45,154,707 44,573,016 48,966,567 GEL Share in total supply 26 23 25 18 7 4 5 17 24 32 29 29 (%) Number of Days 31 28 31 30 31 30 31 31 30 31 30 31 Balancing Market Turnover 1,268,807 1,181,795 1,112,671 771,145 373,109 198,056 197,403 682,072 921,786 1,456,603 1,485,767 1,579,567 GEL/DAY
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Assumptions
Interest Rate - Short term 6.7% Deposits in GEL Number of Days 365
Days for settlement Types of Settlement Comment
Current State (D+) 55 Physical Meter reading
Meter reading Day Ahead (D+) 2 Planned occurs by the end of month
Blockchain (D+) 1 Physical Meter Reading
D = Trade Day Exchange Rate - USD/GEL (average) 2.53 Source: ESCO 2018, NBG 2018.
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APPENDIX B: CONSORTIUM MOU TEMPLATE Memorandum of Understanding (MoU) between Organization X and Organization Y This MoU will outline the objectives, scope, deliverables and commitment required from each participant partaking in the ____ blockchain initiative. 1. Goals of Collaboration _____ is seeking to leverage blockchain as an innovative technology to solve complex technical problems that legacy systems cannot address. To achieve this vision, it has been agreed that a blockchain development consortium would be established across the _____ network to test, explore and develop blockchain use cases that will bring overall value to the Georgian power market and better serve the end customer.
2. Scope of the Engagement Following on from the deliverables in Phase I (use case validation, blockchain proof-of-concept (POC) prototype development) the _____ System will now execute on building the selected blockchain use case, onboarding plans to the blockchain platform and implementing the operating and governance procedures of the consortium.
Phase II: Build Use Case and Formalize Phase III: Execute the Use Case and Operationalize Governance Governance o Formalize governance operating model with kickoff of o Activate consortium governance with key committees decision-making participants o Scale blockchain prototype to a functioning pilot with o Define operating guidelines for governance of connecting member organizations the selected use case o Align on pilot security requirements with the participating o Complete security monitoring and assessments member organizations with ___ security teams o Begin transition of operational roles to member o Gain commitment from the power sector to organizations for governance and technology operationalize governance in phase III o Ongoing training for role transitions and support of the governance model and pilot
3. Value Proposition
The Georgian power market faces many challenges today, particularly around their ability to validate and share trusted information across the network to better serve the wholesale customer. In Phase I the organizations identified Settlement Process as a key challenge to be addressed. The intent of the blockchain platform is to significantly reduce the time required for the current settlement process through the secured sharing and validation of provider data across the _____ System. 4. Organization of Collaboration _____ will facilitate the management of the organization and governance structure in Phase II – providing PMO, business and technical resources to facilitate, coordinate and support committee meetings and outputs. Consortium participants will actively participate in key decision making around use case prioritization, execution and development. Organizations will be expected to enhance engagement in Phase III as ownership of operating and technical roles will start to transition to consortium participants. A technical developer from each organization will support the integration of the consortium to the blockchain platform to execute delivery of the pilot use case.
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5. Organization Commitment The following resource and effort commitment is required from each participating organization specific to Phase II. Engagement expectations and responsibilities will likely increase in Phase III. Phase II Role Hours Description
Business Committee 2-4 per Provides direction and guidance on scope of the consortium, actively Representative Week participates in advisory committee meetings and makes decisions
Technical Committee 2-4 per Plays a key role in providing technology roadmap for their organization to Requirements Week integrate with the consortium and provides inputs on platform management and maintenance
Decision Maker 2 per A visible champion for the consortium. Provides strategic direction, aligning with Month overall strategic objectives. Provides final sign-off for key strategic decisions
Technical Developer 2 per Hands-on interaction with the blockchain platform – supports the use case build Week development and the organization’s integration to the platform
Supporting Staff TBD SME’s who can provide guidance and direction around Data, Legal, IP Management, Compliance, etc
6. Intellectual Property In Phase II _____ will retain ownership and IP rights to the initial use case prototype build. IP management for pilot build and future use case selection and development will be formalized and signed-off by the relevant committee members in Phase II.
7. Investment ______will provide the funding to finance the establishment of the blockchain consortium and factory (Phase II and Phase III). Plans will contribute resource investment (as outlined in section 3) and will be responsible for covering the cost of hosting their own blockchain node in Phase III.
8. Data Sharing Further development of the blockchain POC in Phase II will utilize dummy data to simulate the use case value. In Phase III, Plans will be required to share data relevant to the specific use case (Provider Data is intended as initial use case, pending agreement from all organizations). Data sharing, management and access rights will be formalized and signed-off by the relevant committee members in Phase II.
9. Operational Impacts Organizations are responsible for preparing their organization for any change requirements post integration to the blockchain platform; including ensuring adequate blockchain training for both technical and business resources and implementing a change management program for impacted processes.
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10. Confidentiality All organizations need to agree on confidentiality of the collaboration. Should any data be shared in the course of collaboration, all parties need to ensure they comply with data privacy rules and regulations.
11. Duration This MoU covers commitment from the organization to actively participate in the ______blockchain throughout Phase II. A more formalized agreement will be presented to all organizations at the end of Phase II detailing specific governance and operating procedures to be agreed upon before progressing to Phase III.
Signed ______Organization X Organization Y Date: Date:
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USAID Governing for Growth (G4G) in Georgia Deloitte Consulting Overseas Projects LLP Address: 5 L. Mikeladze Street, Tbilisi Phone: +995 322 240115 / 16 E-mail: [email protected]