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How PG&E Wants California to Manage Carbon Credits with a Distributed Ledger

PG&E’s self-proclaimed ‘Blockheads’, who were assigned to investigate how to implement blockchain into PG&E’s business, chose the California low-carbon fuel standard (LCFS) as an initial testing ground. PG&E choose LCFS, which has about 250-300 active participants, because the Blockheads believe blockchain has the potential to make the overall process smoother. A low-carbon fuel standard is enacted to reduce carbon intensity in transportation fuels, including conventional petroleum fuels, such as gasoline and diesel. Common low-carbon fuels include alternative fuels like natural gas. The main goal of such standard is to decrease carbon dioxide emissions associated with vehicles powered by internal combustion engines.

At PG&E, the Grid Edge team is working to understand the true value propositions of blockchain, and how the technology will impact the traditional utility business model, including the exploration of transactive energy in the context of blockchain. The utility plans to spend the next year or so deep-diving into that.

The company continues to discuss the nascent technology with many different platforms, providers, and startups to understand the capabilities of blockchain. “Definitely a very fast moving space, a lot of things popping up every week,” says Umachi. It has been working with external entities and consortia to bridge some of the gaps between traditional utility architecture and blockchain.

On its radar are things like the California Consumer Privacy Act, which is similar to Europe’s GDPR, and its implications for blockchain-enabled apps. And so, the company has spent a lot of time talking to lawyers about the implications there.

“We’ve been spending a lot of time talking to our legal folks and also talking to external groups, as well,” said Blockhead CK Umachi, a member of the Grid Edge team, which focuses on emerging technologies and their impact on utilities.

PG&E joined MOBI, the Mobility Open Blockchain Initiative, a nonprofit smart mobility consortium working with forward thinking companies. “We’ve been utilizing them to help us with some of the research on the policy side as well,” said Umachi.  “We continue to do market research and benchmarking.” PG&E is also a part of the Utility Blockchain Interest Group, a utility-only organization conducting market research.

California’s LCFS is a statewide program, managed and administered by the California Air Resources Board (CARB), which has an objective to reduce the carbon intensity of transportation fuels 20% by 2030. The program is similar to a cap and trade program. Some producers are considered “below the line,” meaning they are considered to produce low carbon intensive levels; think electricity and natural gas. These producers opt into this program and generate LCFS credits, owing to the fact that they supply low carbon intensive transportation fuel.

Those considered “above the line” must participate in the program. Those above the line producers, who typically produce more carbon intense transportation fuels like gasoline and diesel, are obligated each year to purchase carbon credits to offset emissions. Presently, the process can be broken into three phases: a credit generation phase, a validation phase, and the marketplace.

In the credit generation phase, an entity will collect data on charge events from various sources. The state gathers data such as vehicle telematics data, charging infrastructure data from smart meters, and the grid’s carbon intensity. “Once that data is gathered, the entity actually selects a credit methodology, and applies a specific process and calculation that generates a certain number of credits, and that data and the calculation is then submitted to CARB,” said ‘Blockhead’ and Grid Edge team member, Dick Kim, referring to California Air Resources Board (CARB).

CARB then validates the data. Once verified, CARB awards credits to the appropriate entities. “And then, every once in awhile, the entity will go into this marketplace, and they’ll monetize those credits, typically in the form of very large bilateral transactions,” explained Kim. Shell, for instance, transacts typically about 50 to 60,000 credits in a given quarter.

For large enterprises, PG&E included, there are dedicated folks and teams to manage the carbon onset program. For smaller businesses, the process might be quite burdensome.“It’s difficult for [small businesses] to understand what kind of data to collect, how to collect the data, and how to work with that data,” said Kim. “Once they can collect that, they have to go through the process of navigating the complex program.” Businesses have to ask themselves certain questions, like ‘How do I maximize credit?’ and ‘What calculations do I apply?’Many of the validation processes are manual.

“Under the current structure with the number of participants, it is manageable,” says Kim. “But, if you think about scaling this out, potentially to thousands and tens of thousands of customers, that’s a lot of overhead and processes to take on.” PG&E doesn’t believe its scalable in current state. Deficit producers, for instance, need a bilateral contract in place.

“That small commercial and industrial customer [doesn’t] have a team dedicated to creating these customized contracts,” said Kim. “Even if they want to participate, it’s hard for them to actually do it. So, therefore, they use brokers, and brokers take margins at the top [and] erode the value that they would otherwise receive.”

The Blockheads believe blockchain and decentralized applications can cut out the middleman and automate the LCFS program through smart contracts, executing more efficiently the credit methodology and maximizing credits for every individual customer based on the specific inputs they are providing.

“This is where blockchain provides that inherent audit trail in the form of the immutable ledger,” Kim said. “If we can abstract that into a nice UI for CARB, and for other participants, we believe that this will become a much more scalable solution, especially from an auditability perspective. The technology is going to be able to enable peer-to-peer transactions that are more real time. It becomes more cost efficient.”

Over the last two years or so, PG&E has been prototyping such a system. They’ve worked with different partners, including BMW, Energy Web Foundation, Blockchain at Berkeley, and West Monroe. The focus has been on creating a product grade minimum viable product focused on the credit generation and evaluation phase for internal use in the LCFS process. They see it as a good foundation to build the functionality they ultimately believe is possible.

PG&E collects data from sources like electrical vehicle recharge events. The data is then standardized and recorded in an off-chain database. Roughly every day or so, the program summarizes that data and batches it. The appropriate smart contract logic then triggers the credit methodology, and those credits are calculated and attributed to the right entity.

PG&E wants to be able to take the credits that its calculates and export them into a CARB approved LRT format. LRT is an acronym for ‘LCFS Recording Tool.’ One can export data such as how many credits were generated, what kind of energy was consumed, and the estimated value of those credits, as well as look at the specific individual charge events that have contributed to the number of credits.

The off-chain data is summarized daily in a batch process. Storing the data is something PG&E has had to think through. “While the immutable nature of the blockchain is great, when you’re trying to ensure that nothing gets tampered with in the future, it’s kind of  curse if you put stuff on it that you don’t want to put on there,” said Umachi. “So everything we’ve done thus far, it’s been in our own sandbox.”

PG&E has maintained its focus on credit generation. “Within that, there’s a bunch of functional pieces that are possible to do in the LCFS process,” said Umachi. “Now we need to figure out how we can implement them into the application.”

One of PG&E’s long term goals is onboarding other customers within the utility’s region to help adoption to the LCFS process. “We’re hoping that we can enable some functionality for them to be able to quickly onboard and then kind of use the same platform with us,” said Umachi.

PG&E also wants to understand blockchain’s implications beyond LCFS, and is starting to think through how else it can really start to get its feet wet with the distributed technology.

“[We understand] that some of these longer term transactive energy pieces are probably not ready yet,  but there are essentially some pieces that we can actually start testing out before that will help us decide how we can actually try to integrate them in the future,” says Umachi.

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