energy pools - scottish energy institute 11 11 2009

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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