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
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Peak Credit? - How did the Banking system go wrong?
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A Bank is a Credit Intermediary – or “Middleman”
BankBorrower Depositor
£ £
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But it does not lend pre-existing money….
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….it creates new money as interest–bearing credit….
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….which is then deposited back into the system
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Now, if you think about it, a bank’s true economic function….
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…is to guarantee – backed by shareholder capital - that the borrowers’ credit is good
BankBorrower Depositor
£ £
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Interest is charged for the use of the guarantee
Bank
Interest
Borrowers
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..from which Interest is paid to Depositors..
Bank
Interest
Borrowers
Depositors
Interest
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..Default and Operating costs deducted...
Bank
Interest
Borrowers
Depositors
InterestCosts
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..and a profit to Investors normally results
Bank
Interest
Borrowers
Depositors
InterestCosts
InvestorsInvestors
Dividend
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Banks create a pyramid of Credit, on a base of Equity
Bank Credit
BankEquity
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Demand for Credit was so high…
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….that Banks began to outsource their guarantee to rid themselves of risk.
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…and thus recycle their own Equity to support more credit creation
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Banks outsourced risk totally – through securitising debt and sale to investors….
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…temporarily – with Credit Derivatives (CDS - a time-limited guarantee)….
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…partially – using credit insurance from insurers such as AIG…
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…and radioactive cocktails of all three, like CDOs, structured finance and so on
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The Result was a bigger Credit Pyramid than Banks alone could sustain…
Investor Equity
Credit
BankEquity
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…and an opaque “shadow banking system” of Investors holding sliced and diced risk…
Investor Equity
Credit
BankEquity
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This pyramid of Credit funded the Mother of all Bubbles in US property prices….
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…and servicing this credit finally exceeded the financial capacity of the US population.
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About August 2007 – the point of Peak Credit – the Bubble started to deflate
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..but by now no-one knew where the Risk was
Investor Equity
Credit
BankEquity
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Banks started to think, “if this is what our balance sheet looks like…..”
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“…what does everyone else’s look like?”
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The problem is not shortage of money - liquidity
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….it is shortage of Equity - a solvency problem
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Bank Equity is eaten away by defaults
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Investors are licking their wounds…
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…and will not buy financial toxic waste any more
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The Result?
Equity
Credit
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Defaults drain money out of the system...
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…threatening a “deflationary spiral”
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So now where are we?
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Like a patient after a crash….
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…the visible wounds of the banks have been
patched up…
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….but internal bleeding continues from the ‘shadow bank’ loans
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…the patient needs surgery…..not the application of leeches
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QE is the transfusion of public credit which is keeping the patient alive
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However, no amount of Central Bank liquidity can make customers more creditworthy.…
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…because if debt cannot be paid then it will not be paid.…
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The solution cannot be monetary and must therefore be fiscal
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Switching taxation to wealth is politically impossible….
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Our proposed solution is a new approach to investment….a debt/equity swap
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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
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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
% %
%%%
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Productive assets are held by a “Custodian”..
AssetsAssets CustodianCustodianOwnership
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…Investors put in Financial Capital in money, or “money’s worth”…
AssetsAssets
Investors
CustodianOwnership
Financial Capital
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…Managers provide Human Capital of time, expertise and experience....
AssetsAssets
Investors
CustodianOwnership
HumanCapital
Financial Capital
Managers
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..Users pay for the use of Capital
AssetsAssets
Investors
Payment
% %
Custodian
Use
Managers
Users
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Generic Capital Partnership Framework
AssetsAssets
Investors
Payment
% %
Custodian
Use
Managers
Users
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Capital Partnership reinvents Equity
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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%
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Units – Redeemable in production eg Kilo Watt Hours, natural gas
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Units have a value in exchange, but no rights to production or income over time…
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Asset-based on value provided by issuer...
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….rather than deficit-based upon a claim over value issued by a Bank
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Let’s have a look at an Energy Pool for a wind turbine
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Two Phases – Development and Operation
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Development phase: firstly, a Custodian
AssetsAssets CustodianCustodianOwnership
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Suppliers provide money’s worth
AssetsAssets
Suppliers
CustodianOwnership
CapitalEquipment
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They may invest equipment & materials if they are willing and able
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...but must invest agreed profit margin, thereby giving a stake in the outcome
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Investors provide risk capital for costs suppliers cannot or will not invest
AssetsAssets
Investors
CustodianOwnership
Risk Capital
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Managers provide Human Capital of time, expertise and experience
AssetsAssets
Investors
CustodianOwnership
HumanCapital
Financial Capital
Managers
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...and the turbine is installed
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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
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Managers receive an Equity Share
AssetsAssets
Payment
x%
Custodian
Electricity
Managers
Consumers
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Operation Phase
AssetsAssets
Investors
Payment
100-x% x%
Custodian
Electricity
Managers
Consumers
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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
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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 ...
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….make a net transfer to those with below average carbon use
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Energy Pool offers a new approach to the Kyoto carbon markets....
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...as invented by Enron...
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...where the Emperor has no clothes
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Overheard at a traders’ conference.....
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“If you want to keep a cow healthy, you don’t regulate what comes out of it……”
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“……you regulate what goes in….”
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An Energy Pool enables a Carbon currency based upon the intrinsic value of energy…
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..rather than a market in value-less Units of CO2 emissions, imposed by governments …
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….and promoted by the same people who brought us the Credit Crunch
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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
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It transcends borders through interactive consensual contrats de société...
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...rather than national or international institutions and hierarchies
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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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