Energy disputes in a decentralised network

The energy transformation is being shaped by the “three D’s” – decarbonisation, digitisation and decentralisation. However, this transformation could significantly impact the types of legal dispute which arise, and potentially deny access to justice, without which a fourth “D” –  democratisation – is illusory.

Digitisation: data sharing

Data sharing could facilitate the development of new wind or solar energy projects. Power companies are being encouraged to make data about connection points, capacity, future upgrades etc openly available, so other market participants can efficiently plan and construct new projects. Digital twins, which are interactive digital replicas of physical entities, take data sharing a step further by enabling the interaction of a new energy project with existing/planned infrastructure to be modelled.

This is legally significant. If the shared data is inaccurate or misleading, those relying on another party’s data might make serious errors. For example, assume a power company plans and constructs a solar farm relying on shared data. The data indicates that the necessary supporting infrastructure exists and has capacity to accommodate its output, but that information is inaccurate and the solar farm cannot operate unless remedial work is done.

• Could the developer bring a claim for damages? That would depend upon establishing a contractual right or a tortious duty of care, which will depend on the circumstances, but such a claim is possible.
• Who does the claim lie against – the infrastructure owner, or the host of the information sharing hub? Potentially it could be either, or both, depending on whose fault the inaccuracy was.
• Could the developer claim only the costs of remedial work, or could it claim loss of profits while the remedial work was done too? In principle this would depend on establishing a claim for pure economic loss and proving the foreseeability of the losses.
• Finally, can one exclude liability to those accessing the shared data? If so, practically speaking, would anyone want to use the shared data? If liability cannot be excluded, would anyone participate in the shared data scheme? The answer to the latter issue might be to compel data sharing by legislation, but that could place a potentially severe financial risk onto industry participants.

Digitisation: smart contracts

In future, blockchain, the Internet of Things (IoT), machine learning and smart contracts could enable energy efficient “smart communities” to be built. This could include “micro-grids”, comprising housing with high efficiency solar roof tiles and an electric vehicle (EV) charging point, linked to a centralised energy storage facility. Smart technology, allowing electricity usage patterns to be established via data gathered from IoT, could enable efficient (potentially automatic) demand-side energy management. It could also allow electricity generated from solar arrays and stored in EV batteries to be sent from one house which does not need it at that time to another house which does, or sent to the on-site storage facility.

Central to this concept would be smart contracts, which are self-executing contracts with the terms of the agreement between buyer and seller directly written into lines of code. The code controls the execution of the contract, and transactions are automatic, trackable and irreversible.

Conceptually it would be possible to use electronic monitors and IoT to log all flows of electricity in a micro-grid, generating data which is used by the smart contract entered into by each micro-grid participant (called a prosumer) to automatically make payment transfers between prosumers.

Smart technology and smart contracts are crucial for micro-grids because prosumers are unlikely to have the time (or inclination) to make decisions on who to sell excess electricity to, or to keep records of the transactions.

But what if the system breaks down and the input data, although verified by the underlying blockchain or other programming, is wrong?

For example, what if the delivery point monitors incorrectly record the amounts of electricity being delivered and the receiving prosumer pays the wrong amount to the exporting prosumer?

• Can the measurements be challenged? This would undermine the point of a smart contract – ie the system automatically and authoritatively determines whether payments should be made, without party input. By agreeing the smart contract, do the parties expressly or impliedly accept that they cannot challenge system readings and outputs? That might depend upon whether the code-based smart-contract is linked to a traditional written contract with comprehensive terms governing such issues.
• Would any efforts to exclude liability and the right to challenge breach consumer protection legislation? Would a prosumer be a “consumer” for the purposes of the Consumer Rights Act and associated legislation? If so, should they be excluded by new legislation?
• If a challenge is allowed, who determines whether the measurements are correct and whether repayment is required? Again, that will depend upon the existence of a written contract overlaying the smart contract, which might provide for alternative dispute resolution (e.g. reference to a third party expert). Otherwise, disputes would have to be resolved in court.
• Would a cause of action lie against the energy services company (potentially an aggregator) or the other prosumers, who underpaid for the electricity? Would a claim result in the energy services company joining prosumer(s) as co-defendants, leading to a complex, costly, multi-party court case?

Decentralisation

The smart community micro-grid scenario above is an ideal example of the third “D” – decentralisation. Prosumer-produced energy could be aggregated to constitute a “virtual power station” feeding into the national grid. Aggregators and energy services companies could play a crucial role in efficiently organising, and acting on behalf of, large groups of individuals and small businesses acting as prosumers, combining power output and contracting with larger organisations on their behalf.

But what if there is a dispute between the aggregator and prosumer? What if they refuse to make payments to the aggregator? Individually each claim might be so financially insignificant that it cannot be litigated cost-effectively. But to the individual prosumer, a disputed amount might be relatively significant.  To the aggregator, cumulatively such claims could be considerable, and not recovering them could be death by a thousand cuts. How can access to justice be provided if neither party can afford to go to court or arbitration to enforce their rights?

One solution might be the establishment of an industry dispute resolution mechanism like the Financial Ombudsman Service, offering cheap and relatively speedy resolution of such disputes – an energy small claims court. In the absence of that:

• For prosumers, class action rights might provide a solution. In order to encourage decentralisation, legislation might have to provide more easy access to this than the rather cumbersome process currently in place.
• For the aggregator/energy services company, a solution might be something which Clyde & Co is currently undertaking for a client in the aviation sector, a funded claims portfolio. Working with a “third party funder” – an organisation providing funding for litigation/arbitration – Clyde & Co effectively acts as a “claims aggregator”, using efficiencies of scale and standardised documents to pursue all debt claims over a de minimis threshold on a “no-recovery-no-fee” basis, in return for a percentage of the sums recovered. Variations of this model might be required to ensure aggregators working with decentralised energy providers can access justice where required.

Conclusion

The energy transition poses numerous challenges to dispute resolution. However, forewarned is forearmed, and if these questions are understood and considered at the commencement of the ambitious projects which will transform our energy networks, problems can be minimised and solutions developed.