The world has progressed rapidly and has witnessed several advances that resulted in tremendous changes in how the world works. Steam engines allowed the transportation of goods across nations without relying on animal power. Machines brought about mass production and computers led to the digital era. However, the Fourth Industrial Revolution (IR4.0) is fundamentally different as it is able to infiltrate every industry and discipline, challenging the way things are done. The utility industry is not untouched by this behemoth. Industries that are traditionally centralized, owned and managed by governments, like the utilities, are facing disruption in their modus operandi. The trend of the utility industry is towards decentralization with the advancement of digitalisation and the introduction of the IR4.0. Peer-to peer (P2P) energy trading among solar prosumers are already happening which empowers them to choose their preferred source of electricity.
So how does it work ? Consumers become prosumers by installing solar panels, meters with sensors and smart digital technology on their rooftops. Information on energy production, consumption and excess energy are measured by the digital smart meters and the information is relayed to a mobile application. The surplus energy is then sold by the prosumer to the energy market via an online trading platform. The transactions are fully automated with smart contracts using blockchain-based networks to record the transactions. The smart energy grid then delivers the purchased energy to consumers or other prosumers.
How does Islamic finance fit into this scenario? The Salam contract can be an excellent choice of contract for P2P energy trading. Basically the Salam contract is a forward sale where the full price is paid in advance before delivery of the specified quality and quantity of product, where the delivery date is determined It was a contract used by farmers with liquidity problems as usury was prohibited. It had a dual benefit of providing advance money for the farmers and also locking in a lower price for the buyer as payment was made in advance.
The Salam contract has several conditions to be fulfilled in terms of sale object, price, delivery of sale object, seller, buyer and the contract. There must be certainty about the sale object in terms of quantity and quality. Payment price must be paid in full at the time of the sale. The purchase price is lower than spot price because of the advance payment. The time and place of delivery is fixed. The seller need not be the manufacturer or producer of the asset. The buyer has the right to demand security or collateral from the seller to ensure prompt delivery of sale object on the agreed date.The Salam contract is binding in that neither party has the right to annul it without the consent of the other.
The proposed model for P2P energy trading using the Salam contract is discussed. The buyer purchases a fixed amount of energy in kilowatts (kW).The buyer selects the best price for energy that is offered by sellers. The buyer locks the price by paying in advance. The transaction is made on a blockchain platform.The sale object is energy and the amount of energy purchased is measured by kW and the data of the energy transferred can be measured by smart digital meters that feed the data into the blockchain platform. The energy sold will be transferred to the buyer through the participating network. A certain amount is paid to the grid provider to physically transfer the energy. The delivery is fixed at an agreed timing. The seller need not be a producer as long as he/she can deliver the product at agreed date. In the case, the seller is unable to deliver the agreed amount at agreed time, it is the prerogative of the seller to obtain the kW at market price and deliver to the buyer at no extra cost. Thus, the buyer will obtain the energy at the paid price. The buyer is given the security that seller has to deliver the energy even if he/she needs to buy from the open market to deliver to the buyer.Although the contract is binding, it can be altered or terminated by mutual consent.
As a conclusion, the P2P energy trading encourages usage of more renewable energy and less of fossil fuel. It decreases the price of electricity and the electricity tariff as we know it may cease to exist. New revenue streams for large organisations and private homes can be generated, which did not exist before. This will allow greater participation of consumers in the production and redistribution of energy evolving from merely being one-way energy consumers to multi-directional energy prosumers.The government will be forced to develop policies to embrace these changes and these are positive changes that will greatly benefit the consumers.This is a great opportunity for Islamic finance instruments to be used in innovative ways to incorporate it into the digital economy and not just as banking products.
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