Data and disruptive technologies in energy
Navigating the new energy landscape
Data sharing and innovative tools such as smart contracts and “digital twins” came under the spotlight from industry and legal experts at a recent Clyde & Co seminar The energy sector is evolving fast. As the transition towards “net zero” accelerates, disruptive technologies must and will increasingly transform power generation, delivery and even consumption. Decarbonisation is ushering in a new era of decentralisation and democratisation of supply. Blockchain, artificial intelligence (AI) and the Internet of Things (IoT) are coming to the fore.
Business models are starting to change as the industry seeks to embed innovation, with data and digitisation as critical drivers and enablers of this new paradigm. In many ways, as Richard Power, Partner put it at Clyde & Co’s recent seminar entitled Data and disruptive technologies in energy, “We are in the foothills of this new landscape.” There are many exciting new areas to explore but also many pitfalls lying hidden. The event brought together industry experts and members of Clyde’s specialist energy and technology teams to help navigate them.
Navigating the new energy landscape
DATA: A RESOURCE TO BE SHARED
On a smaller, but no less important scale, formalised record keeping of ‘fragmented’ assets such as solar panel or wind turbine installations on domestic properties would also help the industry more accurately map, forecast and plan for supply and demand. Open Banking was held up as an example of the benefits of a more transparent and collaborative data architecture by Olivier Thereaux, Head of Technology at the Open Data Institute. By increasing access to customer data, the initiative has succeeded in opening up innovation to create new products and services. In order for such an approach to work, the idea must be challenged that data is a commodity to be hoarded or sold, or represents a threat to be feared, he said. Instead “data should be seen as infrastructure”, much like our transport network, which acts as an enabler to commerce and value creation and is shared and governed publicly. Therefore, standards, rules and oversight are essential to create a framework that is trustworthy, sustainable and scalable – something that is still in the relatively early stages of development.
Today, data is playing a critical role in unlocking value in all industries and energy is no different. Many businesses are grappling with collating and using it in the best way, let alone sharing it with others – but sharing is vital if a more flexible, open energy model is to be created, said Stuart Ravens, Chief Analyst at Global Data. That requires a change of culture that will admittedly not be easy to achieve. The benefits of data sharing were illustrated by Clyde & Co Partner Brian Greenwood in his talk about open visibility of infrastructure assets and its effect of the planning and consenting process. For example, having access to infrastructure maps of mainland assets is vital for offshore windfarm developers to know where to land under-sea cabling. However, though it would be to the advantage of all concerned, such information is far from readily available. Barnaby Wharton, Director of Future Electricity Systems at RenewableUK made the point that Australia is already mapping all asset connections to the grid and called on the UK to take this forward on a more centralised basis.
Navigating the new energy landscape
DATA RIGHTS, SECURITY AND QUALITY: HANDLE WITH CARE
With many businesses likely to use specialist third party analytics companies to crunch numbers, impact assessments and well-thought-out contractual agreements must be in place before information is handed over. As Williamson said: Data is now very much a boardroom issue – from the value perspective but also from the risk side. There needs to be rigour and proactivity around managing it. It was a view echoed by Olivier Thereaux, whose view was that like any other risk, data should be subject to corporate risk management processes. “We need to stop thinking about data risk in binary terms of ‘risky/non-risky’ and start seeing it as something that can be mitigated,” he said. With “mindblowing” numbers of data points being created, questions around quality of data came into sharp relief. The possibility of “garbage in, garbage out” as coders put it (whereby inaccurate or unreliable inputs will lead to inaccurate or unreliable outputs) looms large. As the system is modernised over the next decade or so, it’s essential to know where data comes from and how it is constructed, to improve system design and management and ultimately achieve better outcomes for consumers, according to BarnabyWharton.
Clyde & Co’s Mark Williamson and Tom Tippett urged delegates to consider the “rights, restrictions and obligations” of data. Although that there are no property rights here as there are for physical assets, nonetheless data might be subject to contractual terms in relation to the way it can be used, or intellectual property rights may apply. The point was made that having data does not mean there is carte blanche to use or share it, even if it has the potential to deliver a major benefit beyond the commercial sphere to society at large. The message was: handle with care. To help cut through what can seem a daunting “spiderweb” of possible permutations for authorisation to use, store or share data, implementing an organisation-wide data strategy is essential to ensure legal compliance. This will help direct focus, zeroing in on what data a business has, wants and needs and what it must do to leverage or protect it, e.g. via specific clauses in contracts, or by anonymising or segregating data to make it more secure. Importantly given the reputational and financial costs of mishandled data, such measures will enable organisations to get their approach right from the start.
Navigating the new energy landscape
COMMON STANDARDS: DIGITAL TWINS AND DATA INSTITUTIONS
For instance, data from electric vehicles (EVs) could benefit transport planning. Industry buy-in to the idea of digital twins is high – but there’s a problem. Currently, businesses are all following their own paths. For digital twins to facilitate data sharing, Enzer explained: We all need to be speaking the same language. Semantic precision enables consistency of data that enables frictionless sharing. Therefore, the Task Group is working to develop common standards. This is likely to be achieved via a combination of market forces and regulation. Enzer anticipates that to create a fully optimised National Digital Twin network is a 30-year, multi-generational programme, but is simultaneously working towards a shorter- term 3-year roadmap too, to demonstrate the worth of the initiative. Other tools outlined at the event to help develop an appropriate infrastructure for sharing data included ideas such as data catalogues, libraries, co-operatives, trusts or other kinds of data institutions which would increase data access while reducing the costs of data stewarding. Again, this requires a concerted effort to make data shareable, before it can be shared.
The adoption of common standards for the use of data and the inter-operability of digitised models is vital if the energy industry is to reap the benefits of this technological revolution. Nowhere is this more obvious than in the development of “digital twins” – a new tool which is fast gaining traction as its benefits become clearer, said Mark Enzer, Chief Technical Officer at Mott MacDonald and chair of the Centre for Digital Built Britain’s Digital Framework Task Group. A digital twin is a digital representation of an asset, for instance from a single solar panel, to a whole solar energy farm or even an entire power network. The purpose: to optimise assets via a feedback loop. Raw data from the physical asset is fed into the digital “twin”, which can for instance use AI or machine learning to create sophisticated algorithms or simulation engines, to deliver insights that can help make better decisions around the physical asset, creating better outcomes. Ideally, these digital twins will ultimately feed into a national ecosystem of connected digital twins, to add even more value by opening up access to information which can be harnessed by the whole energy sector – or even other related sectors, creating better outcomes on a much bigger scale.
Navigating the new energy landscape
NEW APPROACHES TO DISPUTE RESOLUTION
THE ART OF SMART CONTRACTS
Looking to a future where consumers can generate power from their own sources which can be sold to other consumers or back to the grid, such as via roof-mounted solar panels or EV batteries, many liability issues arise. Such as: will these “prosumers” (as Power dubbed them) be treated as consumers (with associated legal protections)? If power generation monitors are defective, for example, will a challenge be allowed under these new contracts? And who will determine whether payments are correct? Furthermore, disputes might be hard to litigate cost effectively. Though individual amounts may seem small, they are likely to be significant on both sides. For “prosumers”, the sums at stake could represent a large proportion of household income. For aggregators, failure to recover small amounts from multiple domestic producers could collectively have a serious impact on the bottom line. Clearer legislation will be vital if policymakers want to encourage the creation of such “microgrids” – the point was made that applying the same rules to domestic producers as large-scale generators would be unfair. Greater access to justice will be important too, and suggestions included the establishment of an independent dispute resolution service to process claims quickly and cheaply – much like an energy small claims court. Alternatively, consumer class actions may need to be made easier. For energy services companies/aggregators, Clyde & Co is already offering no-win, no- fee services to handle portfolios of claims, teaming up with a litigation funder.
Here too, he acknowledged the importance of being 100% confident about the reliability of the data sources used, front- loading the analysis and thinking the system design through at the start of the process, as changes are very hard to make later on once the code has been created. The potential uses and benefits of aligning commercial interests, legal needs and coding logic in this way are significant. Creating smart clauses that respond automatically to data and take appropriate action; enabling fast and accurate back office reconciliation; and creating audit trails that reduce uncertainty and mitigate risk – these are just some of the ways in which smart contracts are game- changing. There are applications across all sectors (Clyde is currently involved in projects automating parts of the standard construction contract (JCT) and creating “digital passports” for planes). Given the opportunity set presented by increased industry-wide data integration, there is huge scope within the energy sector too. For example, Clyde & Co has developed a unique off-the-shelf smart contract which covers the insurance of a solar energy producer against the risk of a shortfall in expected energy generation due to unfavourable weather. Smart clauses embedded in the contract respond to adverse weather data using pre-agreed index triggers, with pre- determined caps and minimums. Data from a trusted source calculates the number of claimable days, with pay-outs being triggered automatically.
“Smart” contracts, inwhich parties transact within a digital framework, written in computer code and with automated features and real-time links to data sources embedded, are set to underpin more and more contractual arrangements in the energy sector, from insurance policies to supplier agreements. Indeed, most “prosumer” contracts are likely to be “smart” so that they can be managed without the need for human intervention. Lee Bacon, a Clyde & Co Partner who is also a founder of its new “Clyde Code” smart contracts division which has developed its own proprietary smart contracts for clients to use, explained how they combine cutting edge technology such as blockchain and AI with fundamental legal principles. It’s a step on the road towards “connected contracting”, using technology to make the process more efficient and intelligent, while building trust into the system. Electronic signature, web services and other software systems can be integrated into digital contracts alongside automated payments which can be triggered by IoT sensors, market prices or other real-time data sources, and contract lifecycle and transaction data can be securely managed and shared.
Whether the greater transparency envisaged in this brave new world will increase or reduce the risk of disputes was a moot point, with issues such as ownership, reliability and security front of mind. At this early stage, there aremore questions than answers around liability, explained Richard Power. For example, if a company relies on incorrect information shared by a third party, do they have a claim if things go wrong? If so, exactly who will it be against? If a claim is possible, will it just be for the remedial work or loss of profits and/ or other consequential losses too? Can liability for reliance on inaccurate data be expressly excluded in contracts? The list of potential issues to consider is long. Mark Enzer made the point that greater clarity from real time information should help avoid bad decisions being made, but that if they are, “there will be nowhere to hide” because the mystery that exists currently around how decisions were made and on what basis will vanish. The decentralisation
and democratisation of the energy market also creates uncertainties.
Navigating the new energy landscape
In the words of Stuart Ravens:
The industry has taken innovation seriously, but
competition is intensifying and change is moving faster than we think. The future is flexibility, and that is going to require a very different approach to the traditional linear model. As the sector undergoes this revolution, there is much work to do to adapt systems and create structures that are fit-for- purpose. Data and digitisation are at the heart of this new world order - which, properly stewarded, should help make better decisions and create better services. By bringing together a range of experts to discuss the critical commercial and legal issues, highlight what we can learn from other industries and what industry-specific considerations the energy sector faces, the seminar was valuable platform to stimulate debate and help businesses prepare.
Expert commentary: Greater resilience required
The energy industry will continue to be at the forefront of adapting to change, particularly as the climate emergency becomes an ever-increasing priority for the public, governments and regulators. Responding to the challenges of the energy transition by taking full advantage of data and disruptive technologies will be one of the key ways in which industry participants can thrive. The use of digital tools highlighted at this event will be critical to delivering a system with higher efficiency and resilience to events which can adversely impact the supply of energy to consumers. Without fully leveraging data, for instance to increase the visibility of energy assets and how they interact with each other, the stability of the energy system is at risk. This is a pressing issue. Last summer saw the disconnection of more than a million electricity customers in Britain's largest single electricity system disturbance in over 10 years, which was worsened by the loss of distributed generation. The Electricity System Operator and Distribution Network Operators only have estimates of how much power was lost during this event largely because there is still a lack of visibility, monitoring or control of it.
It's clear that a smarter, more transparent energy system will be required as the transition to decentralised, smaller, less predictable sources of energy continues at pace. Using innovations like smart contracts, blockchain and machine learning we can greatly increase our understanding of risks, predict outages and find ways to build in greater system durability. Helping businesses deal with the multifaceted effects of decarbonising, decentralising and digitising the energy system is an area where Clyde & Co is particularly active, with extensive experience advising a range of clients on the complex issues it raises and how to adapt to these forces. Using our leading edge expertise in the energy, construction, data and technology sectors, Clyde & Co’s Resilience Campaign is dedicated to helping businesses understand the latest thinking on risk management, the regulatory landscape and what the future may hold. For more information on the issues raised in this report, please contact Richard Power.
Richard Power Partner, London T +44 20 7876 4827 E
Clyde & Co LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. No part of this summary may be used, reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Clyde & Co LLP. Clyde & Co LLP is a limited liability partnership registered in England and Wales. Authorised and regulated by the Solicitors Regulation Authority. © Clyde & Co LLP 2020
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