energy pools - scottish energy institute 11 11 2009
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Energy Pooling
Scottish Energy Institute
Chris Cook , Glasgow
11 November 2009
A New Approach to Energy Investment
Peak Credit? - How did the Banking system go wrong?
A Bank is a Credit Intermediary – or “Middleman”
BankBorrower Depositor
£ £
But it does not lend pre-existing money….
….it creates new money as interest–bearing credit….
….which is then deposited back into the system
Now, if you think about it, a bank’s true economic function….
…is to guarantee – backed by shareholder capital - that the borrowers’ credit is good
BankBorrower Depositor
£ £
Interest is charged for the use of the guarantee
Bank
Interest
Borrowers
..from which Interest is paid to Depositors..
Bank
Interest
Borrowers
Depositors
Interest
..Default and Operating costs deducted...
Bank
Interest
Borrowers
Depositors
InterestCosts
..and a profit to Investors normally results
Bank
Interest
Borrowers
Depositors
InterestCosts
InvestorsInvestors
Dividend
Banks create a pyramid of Credit, on a base of Equity
Bank Credit
BankEquity
Demand for Credit was so high…
….that Banks began to outsource their guarantee to rid themselves of risk.
…and thus recycle their own Equity to support more credit creation
Banks outsourced risk totally – through securitising debt and sale to investors….
…temporarily – with Credit Derivatives (CDS - a time-limited guarantee)….
…partially – using credit insurance from insurers such as AIG…
…and radioactive cocktails of all three, like CDOs, structured finance and so on
The Result was a bigger Credit Pyramid than Banks alone could sustain…
Investor Equity
Credit
BankEquity
…and an opaque “shadow banking system” of Investors holding sliced and diced risk…
Investor Equity
Credit
BankEquity
This pyramid of Credit funded the Mother of all Bubbles in US property prices….
…and servicing this credit finally exceeded the financial capacity of the US population.
About August 2007 – the point of Peak Credit – the Bubble started to deflate
..but by now no-one knew where the Risk was
Investor Equity
Credit
BankEquity
Banks started to think, “if this is what our balance sheet looks like…..”
“…what does everyone else’s look like?”
The problem is not shortage of money - liquidity
….it is shortage of Equity - a solvency problem
Bank Equity is eaten away by defaults
Investors are licking their wounds…
…and will not buy financial toxic waste any more
The Result?
Equity
Credit
Defaults drain money out of the system...
…threatening a “deflationary spiral”
So now where are we?
Like a patient after a crash….
…the visible wounds of the banks have been
patched up…
….but internal bleeding continues from the ‘shadow bank’ loans
…the patient needs surgery…..not the application of leeches
QE is the transfusion of public credit which is keeping the patient alive
However, no amount of Central Bank liquidity can make customers more creditworthy.…
…because if debt cannot be paid then it will not be paid.…
The solution cannot be monetary and must therefore be fiscal
Switching taxation to wealth is politically impossible….
Our proposed solution is a new approach to investment….a debt/equity swap
There are conventionally two types of ownership - Public or Private...
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...and there are two ways of raising finance: Credit and Investment
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Investment through a Limited Company...
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....a 19th Century legal dinosaur...
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...is what makes the Private Sector Private
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Credit is typically issued by banks and secured by legal claims
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...giving two conflicting claims over the same productive asset
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But there’s a new furry animal out there....
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...the 21st Century Limited Liability Partnership (LLP)
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A UK LLP is a corporate body with limited liability....
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...and.....errrr.....that’s it !
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As far as the UK Tax Man is concerned it is a Partnership
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It’s an Open Corporate where
partnership working is possible....
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... even without a written agreement
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It enables Direct “Peer to Peer” (P2P) Credit and Investment
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LLPs are now in pervasive use for purposes never intended...
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...even in the Public Sector, where Glasgow has 4 municipal LLPs
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NET has developed the Capital Partnership
AssetsAssets
Investors
Payment
% %
Custodian
Use
Managers
Users
Capital Partnership – direct Peer to Peer investment in productive assets
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Hilton Capital Partnership ( > £1bn)
Capital Partnership LLP10 UK Hotels
Gross Revenues
Hilton GroupCapital User
Consortium LLP Capital Provider
BankProperty
DeveloperHotel
Specialist
% %
%%%
Productive assets are held by a “Custodian”..
AssetsAssets CustodianCustodianOwnership
…Investors put in Financial Capital in money, or “money’s worth”…
AssetsAssets
Investors
CustodianOwnership
Financial Capital
…Managers provide Human Capital of time, expertise and experience....
AssetsAssets
Investors
CustodianOwnership
HumanCapital
Financial Capital
Managers
..Users pay for the use of Capital
AssetsAssets
Investors
Payment
% %
Custodian
Use
Managers
Users
Generic Capital Partnership Framework
AssetsAssets
Investors
Payment
% %
Custodian
Use
Managers
Users
Capital Partnership reinvents Equity
Equity Shares - % age shares in revenues or production...
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…..which may be transferred, but never redeemed, since there must always be 100%
Units – Redeemable in production eg Kilo Watt Hours, natural gas
Units have a value in exchange, but no rights to production or income over time…
Asset-based on value provided by issuer...
….rather than deficit-based upon a claim over value issued by a Bank
Let’s have a look at an Energy Pool for a wind turbine
Two Phases – Development and Operation
Development phase: firstly, a Custodian
AssetsAssets CustodianCustodianOwnership
Suppliers provide money’s worth
AssetsAssets
Suppliers
CustodianOwnership
CapitalEquipment
They may invest equipment & materials if they are willing and able
...but must invest agreed profit margin, thereby giving a stake in the outcome
Investors provide risk capital for costs suppliers cannot or will not invest
AssetsAssets
Investors
CustodianOwnership
Risk Capital
Managers provide Human Capital of time, expertise and experience
AssetsAssets
Investors
CustodianOwnership
HumanCapital
Financial Capital
Managers
...and the turbine is installed
Sounds great, but where does the money for the costs come from?
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Simple: the turbine creates a Pool of future production
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...and from this Pool we sell Units to investors redeemable in payment for electricity...
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… at a discount to the market price
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Operation Phase
AssetsAssets
Payment
Custodian
Electricity
Consumers
Managers receive an Equity Share
AssetsAssets
Payment
x%
Custodian
Electricity
Managers
Consumers
Operation Phase
AssetsAssets
Investors
Payment
100-x% x%
Custodian
Electricity
Managers
Consumers
The Pool may now sell Units to consumers and risk averse investors
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Units - the Value Proposition
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Investors - a direct investment in energy with no return...
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....similar to an investment in gold...
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...except that while gold may be pretty...
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....it’s not useful in the way that electricity is
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Consumers have the ability to lock in the price of future consumption
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Units are hybrid – analogous to a futures contract but no expiry date, and no ‘gearing’
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Almost an Exchange Traded Fund Unit but redeemable in payment for energy
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What about Liquidity? Investors selling Units may not find Investor buyers....
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No Problem! Consumers will buy if the Unit price falls below electricity market price...
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...because they would profit by buying Units and redeeming them against
consumption
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Energy Pool
Mega Watts(Custodian)
Mega Watts(Custodian)
Unit Investors
Consumers
Equity SharesManagers, Communities
electricity £ or Units Redeemed
£
Units
Units
Interest-free financing through monetising renewable energy...
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...by issuing - for value now - a Unit that will cost nothing to redeem
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Energy Pooling and Unitisation has further potential beyond funding new renewables
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Existing energy production may be unitised and refinanced interest-free.....
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…releasing funds for further investment
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Nega Watt energy savings - the cheapest energy of all – may be simply financed…
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…energy loans in KwH may be repaid via utility bills out of energy saved
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A £5k interest-free energy loan is 100 Units of 1 Mega Watt Hours sold for £50/MWh....
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....or 10,000 Units of 10 Kilo Watt Hours each sold for 50p
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A reduced bill is paid to the power supplier for energy actually used.....
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...while Units are bought from the Pool to repay the energy loan
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A Carbon Levy on fuel may fund Energy Pool investment in renewable Mega Watts
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…and investment in energy saving Nega Watts
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Unitisation enables an energy dividend from a valuable carbon investment
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The outcome is that those with above average carbon use ...
….make a net transfer to those with below average carbon use
Energy Pool offers a new approach to the Kyoto carbon markets....
...as invented by Enron...
...where the Emperor has no clothes
Overheard at a traders’ conference.....
“If you want to keep a cow healthy, you don’t regulate what comes out of it……”
“……you regulate what goes in….”
An Energy Pool enables a Carbon currency based upon the intrinsic value of energy…
..rather than a market in value-less Units of CO2 emissions, imposed by governments …
….and promoted by the same people who brought us the Credit Crunch
The Energy Pool is not an Organisation...
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...it does not own anything, do anything, employ anyone, or contract with anyone...
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….it is simply a framework for cross border energy investment
It transcends borders through interactive consensual contrats de société...
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...rather than national or international institutions and hierarchies
Energy Pool has no adversarial contractual relationships – contrats de mandat
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...it requires no legislation.....
Master Partnership
Master Partnership
Financial Capital(Money, IP etc)
Financial Capital(Money, IP etc)
UsersUsers
Human Capital(Developers, Operators)
Custodians(National)
Custodians(National)
% %
€
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...no public borrowing and no National Debt
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Thank You
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