* 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, decentralized blockchain uses
* These face legal, scaling, commercial hurdles
* Graphic http://tmsnrt.rs/2G9UJDe
FRANKFURT, March 23 (Reuters) - European utilities plan to begin some direct trades with one another using blockchain technology within months, hoping to stay ahead in a world in which individuals may eventually sell green energy to one another.
The distributed ledger technology that underpins the bitcoin currency has already been tested by energy operators for wholesale trading, but it will go live with just a few selected electricity and gas contracts to start with.
The initiative, Enerchain, is a forerunner of more possible uses of the technology by established energy players and wider options 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 to avoid security issues, digital infrastructure is lagging and players 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 automated trading architectures matching energy producers with each other and also with users.
Apart from staving off competition from more agile digital companies, it could help speed a sector shift in Germany from fossil fuels to renewables, bypassing nuclear, highlighted in a reorganization of E.ON and RWE this month.
German IT company Ponton has worked with 39 power and gas traders to build the peer-to-peer platform since 2016.
Managing director Michael Merz told Reuters its members will choose contracts to go live with as soon as they set up a legal entity to pool budgets, probably in the second or third quarter of 2018, his first detailed comments on the timeline to mainstream media.
The companies, which include prominent names such as Italy's Enel, Germany's E.ON and Sweden's Vattenfall , were driven by the need to lower transaction costs in an era of growing competition and energy supplies, he said.
"Publishing orders and transactions via blockchain can replace trading via brokers," Merz said. "We have developed an order execution process that works just like a typical OTC (over-the-counter) market front end."
COOPERATION AND COMPETITION
Alongside brokers, potential losers from the Enerchain proposition include exchanges such as ICE or EEX , but both are joining the blockchain party.
ICE in January launched a cryptocurrency data feed in January and both it and EEX are discussing applications with customers and tech firms.
"We see this new technology as a real opportunity to further improve our business," EEX chief executive Peter Reitz said during the E-World of Energy trade fair last month.
Instead of administering duplicate databases, blockchain comprises one record maintained by a network of participants rather than a centralized entity: accessible and unchangeable.
Ponton would not monopolize Enerchain software, Metz said, but step back to develop other products, to simplify peer-to-peer grid processes and speed north Germany's green power supply.
Vattenfall business development manager Kilian Leykam said while Enerchain was still in test phase, ."..we are confident that we will see live trades this year when all necessary technical and regulatory prerequisites are fulfilled."
Germany's regulator the Bundesnetzagentur said it keeps a tight watch over networks and retail markets where suppliers are licensed 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 software developers should build into their processes from the start.
"I have to clarify in practice, that I can only sell energy when I've got some, and what happens at other times," he said. "Two or more suppliers must club together and someone has to control that."
Austrian utility Wien Energie, also part of the Enerchain initiative, has been testing blockchain for settling gas trades via the platform of Canadian start-up BTL, co-operating with the likes of ENI and BP since 2017.
Vattenfall also participates in that test consortium, called BTL One Office, which is more focused on trade settlements, and is also close to revealing further progress.
Energy shipments often involve lengthy chains of documents and multiple acknowledgement receipts. Even electronic platforms with central clearing functions can be slow and expensive.
While blockchain cannot yet take on billions of dollars of transactions in equities or currency markets handling thousands of deals per second, energy trades are not overly complex and occur at a rate of one every few seconds, offering a good fit.
Some in a fiercely competitive commodities sector are reluctant to put their data on a common platform, however, making progress slow going.
Research firm IDC estimates global investment in blockchain will more than double in 2018 to $2.1 billion from $945 million last 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 for start-ups looking at digital business models.
Its European School of Management and Technology (ESMT) polled attendees of the city's annual blockchain in energy conference EventHorizon last year and said some 36 percent saw blockchain cutting utility process costs by almost a third.
Another research firm, Trend Research of Bremen, has said more than 80 percent of energy companies it interviewed are planning or preparing blockchain processes, in decentralized energy production, electric mobility, retail sales, renewable power origin certificates, network management and billing.
Merz said financial trading rules with high capital requirements did not apply to Enerchain, as it is defined as a communication channel for data exchanges.
If successful, it could in theory allow the group to pool other professional resources such as risk management and compliance reporting.
Christoph Burger, senior lecturer at ESMT, said Enerchain looked well placed to avoid the lack of trust issues that have caused 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 industry standards must be embedded before blockchain can transform existing mass market processes, experts say.
"A public blockchain may involve everyone seeing the movements around my account, if my smart meter is hooked up to the network," said Ewald Hesse, chief executive and co-founder of Grid Singularity, an energy data exchange platform hosted by the non-profit Energy Web Foundation (WEF).
"It can't be that everyone who is able to code knows what is happening."
It also must be clear who builds and maintains the systems. "Bear in mind that there might be job losses in areas such as controlling, legal, IT and administration," said ESMT's Burger.
Start-ups are drawn to Germany, Europe's biggest and most highly priced power market and home to 1.6 million small renewable 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 millions of prosumers to enter the scene.
Solar panels owners dream of neighborhood power-sharing schemes and of owning electric cars, helped by the roll out of 5G mobile data network services enabling "smart" home applications.
They have been encouraged by sellers of the panels, which will start gradually losing 20-year fixed term subsidies in the next few years, who gloss over the fact that the smart meters needed to enable such schemes are years from being rolled out. ($1 = 0.8096 euros)
(Additional research by Alissa de Carbonnel; editing by Philippa Fletcher)