BP Share News (BP.)

* Europe's Enerchain says to set up legal entity in Q2 or 3

* Utilities join forces to reshape gas, power trading

* Opens door to wider, decentralised blockchain uses

* These face legal, scaling, commercial hurdles

* Graphic http://tmsnrt.rs/2G9UJDe

By Vera Eckert

FRANKFURT, March 23 (Reuters) - European utilities plan tobegin some direct trades with one another using blockchaintechnology within months, hoping to stay ahead in a world inwhich individuals may eventually sell green energy to oneanother.

The distributed ledger technology that underpins the bitcoincurrency has already been tested by energy operators forwholesale trading, but it will go live with just a few selectedelectricity and gas contracts to start with.

The initiative, Enerchain, is a forerunner of more possibleuses of the technology by established energy players and wideroptions explored by a raft of start-ups to harness its potential- many of them years away from execution.

Regulators are seeking to control this strategic sector toavoid security issues, digital infrastructure is lagging andplayers must agree to share data and avoid privacy breaches.

While tentative, Enerchain is a test of the utilities'ability to protect their margins by dominating novel automatedtrading architectures matching energy producers with each otherand also with users.

Apart from staving off competition from more agile digitalcompanies, it could help speed a sector shift in Germany fromfossil fuels to renewables, bypassing nuclear, highlighted in areorganisation of E.ON and RWE this month.

German IT company Ponton has worked with 39 power and gastraders to build the peer-to-peer platform since 2016.

Managing director Michael Merz told Reuters its members willchoose contracts to go live with as soon as they set up a legalentity to pool budgets, probably in the second or third quarterof 2018, his first detailed comments on the timeline tomainstream media.

The companies, which include prominent names such as Italy'sEnel, Germany's E.ON and Sweden's Vattenfall, were driven by the need to lower transaction costs inan era of growing competition and energy supplies, he said.

"Publishing orders and transactions via blockchain canreplace trading via brokers," Merz said. "We have developed anorder execution process that works just like a typical OTC(over-the-counter) market front end."

COOPERATION AND COMPETITION

Alongside brokers, potential losers from the Enerchainproposition include exchanges such as ICE or EEX, but both are joining the blockchain party.

ICE in January launched a cryptocurrency data feed inJanuary and both it and EEX are discussing applications withcustomers and tech firms.

"We see this new technology as a real opportunity to furtherimprove our business," EEX chief executive Peter Reitz saidduring the E-World of Energy trade fair last month.

Instead of administering duplicate databases, blockchaincomprises one record maintained by a network of participantsrather than a centralised entity: accessible and unchangeable.

Ponton would not monopolise Enerchain software, Metz said,but step back to develop other products, to simplifypeer-to-peer grid processes and speed north Germany's greenpower supply.

Vattenfall business development manager Kilian Leykam saidwhile Enerchain was still in test phase, "...we are confidentthat we will see live trades this year when all necessarytechnical and regulatory prerequisites are fulfilled."

Germany's regulator the Bundesnetzagentur said it keeps atight watch over networks and retail markets where suppliers arelicenced and monitored regardless of the technology they use.

Matthias Lang, an energy specialist at law firm Bird & Bird,said this creates high entrance hurdles which softwaredevelopers should build into their processes from the start.

"I have to clarify in practice, that I can only sell energywhen I've got some, and what happens at other times," he said."Two or more suppliers must club together and someone has tocontrol that."

Austrian utility Wien Energie, also part of the Enerchaininitiative, has been testing blockchain for settling gas tradesvia the platform of Canadian start-up BTL, co-operating with thelikes of ENI and BP since 2017.

Vattenfall also participates in that test consortium, calledBTL One Office, which is more focused on trade settlements, andis also close to revealing further progress.

Energy shipments often involve lengthy chains of documentsand multiple acknowledgement receipts. Even electronic platformswith central clearing functions can be slow and expensive.

While blockchain cannot yet take on billions of dollars oftransactions in equities or currency markets handling thousandsof deals per second, energy trades are not overly complex andoccur at a rate of one every few seconds, offering a good fit.

Some in a fiercely competitive commodities sector arereluctant to put their data on a common platform, however,making progress slow going.

Research firm IDC estimates global investment in blockchainwill more than double in 2018 to $2.1 billion from $945 millionlast year, most of it for banking, but expects "strong,double-digit growth" in the energy space between 2016 and 2021.

Germany's capital Berlin has become a thriving hub forstart-ups looking at digital business models.

Its European School of Management and Technology (ESMT)polled attendees of the city's annual blockchain in energyconference EventHorizon last year and said some 36 percent sawblockchain cutting utility process costs by almost a third.

Another research firm, Trend Research of Bremen, has saidmore than 80 percent of energy companies it interviewed areplanning or preparing blockchain processes, in decentralisedenergy production, electric mobility, retail sales, renewablepower origin certificates, network management and billing.

Merz said financial trading rules with high capitalrequirements did not apply to Enerchain, as it is defined as acommunication channel for data exchanges.

If successful, it could in theory allow the group to poolother professional resources such as risk management andcompliance reporting.

Christoph Burger, senior lecturer at ESMT, said Enerchainlooked well placed to avoid the lack of trust issues that havecaused other attempts to use blockchain to founder.

"This is a nicely focused and well functioning use case ...and legal questions are easily resolved," he said.

MASS MARKET HURDLES

New infrastructure is needed and new regulation and industrystandards must be embedded before blockchain can transformexisting mass market processes, experts say.

"A public blockchain may involve everyone seeing themovements around my account, if my smart metre is hooked up tothe network," said Ewald Hesse, chief executive and co-founderof Grid Singularity, an energy data exchange platform hosted bythe non-profit Energy Web Foundation (WEF).

"It can't be that everyone who is able to code knows what ishappening."

It also must be clear who builds and maintains the systems."Bear in mind that there might be job losses in areas such ascontrolling, legal, IT and administration," said ESMT's Burger.

Start-ups are drawn to Germany, Europe's biggest and mosthighly priced power market and home to 1.6 million smallrenewable power production units and over 80 million consumers.

"Things are really going to take off here in the future,"said E.ON's chief executive Johannes Teyssen of solar markets,where rising sales of inexpensive batteries could allow millionsof prosumers to enter the scene.

Solar panels owners dream of neighbourhood power-sharingschemes and of owning electric cars, helped by the roll out of5G mobile data network services enabling "smart" homeapplications.

They have been encouraged by sellers of the panels, whichwill start gradually losing 20-year fixed term subsidies in thenext few years, who gloss over the fact that the smart metersneeded to enable such schemes are years from being rolled out.($1 = 0.8096 euros)

(Additional research by Alissa de Carbonnel; editing byPhilippa Fletcher)