Heat PartnershipsA Green Deal that might actually work Chris Cook I.M.E., London, 29th August 2012
Solutions Capital Partnership (Nondominium) Neutral framework agreement for sharing of risk and reward Capital Partnership does not own anything, employ anyone, or contract with anyone but its members do Agnostic as to legal form (eg Limited Liability Partnership; Company Limited by Guarantee) Prepay (Stock) Undated credit instrument returnable in exchange for value Created, issued, exchanged and returned within Capital Partnership framework agreement
Capital Partnership Consumers Custodian CustodianInvestors Managers
Capital Partnership Custodian Custody of data and accounts Mutual Guarantee Energy Consumers – exchange value for the use of energy Energy Managers Operate system, manage risk, provide quality control Energy Investors Buy Units of stock returnable in exchange for energy Custodian issues energy stock on instruction of Managers Managers supervise issue, exchange & return
Prepay 1.0 - Stock Stock Original form of equity – not shares in Joint Stock Company Prepay/credit instrument issued at a discount to market price Returnable in payment for energy supplied Prepayment for supply UndatedReturn Discount gives absolute return: eg $10s worth of gas for $8 now Rate of Return is variable – literally the rate over time at which stock may be returned to the issuer or sold No interest (money for the use of money)
Prepay 2.0 – Stock reinvented In the late 1990s Enron began to use Prepay Commodities sold at a discount for dollars & delivered later Example: oil market price $100: 1m barrels sold for $90 now and delivery in 6 months Enron used Prepay to defraud creditors and investors Since 2005 investment banks and producers have used prepay to defraud the oil market
Green Deal - Issues Problem Compound interest - bank rates of interest mean many projects are not viable Behaviour (Jevons Paradox) – even if £ is saved there is no guarantee that energy will be saved Solution Direct peer to asset investment in energy Return on energy investment but no compound interest – money paid for the use of energy Unless Exergy is saved £ will not be saved – saving Exergy is saving money
Green Deal 2.0 - Heat Pool and Heat Loans Investors buy Mmbtu units of Heat Stock at a discount to the market price Discount generates a return to energy investors NB - $ billions now invested in energy even without a return Heat Pool energy fund is thereby created in £ Heat Pool fund invests £ in heat production and heat saving projects through heat loans denominated in Mmbtu Projects buy back units of heat stock at the market price through utility bill
How it Works Stock Consumers $ or Stock energy Returned Stock Custodian CustodianInvestors Stock $ Stock Proportional Shares Managers, Producers
Hyde Farm Energy Partnership Consumers (Association) Custodian Custodian Lambeth Council Lambeth Council Investors Managers (Association) (Consortium)
Hyde Farm Partnership – Financing Phase Short term, medium/high risk investment Capital Partnership framework uses transitional LLP vehicle and a mix of grant, debt and partnership equity investment City of Glasgow currently has five municipal LLPs Debt repaid, grants recyclable, and equity investors exit to Funding Phase Investors
Hyde Farm Partnership – Funding Phase Long term, low risk direct investment in energy Capital Partnership framework uses Company Limited by Guarantee framework and energy stock investment Optimal form of investment in terms of risk profile, liquidity and sheer simplicity Optimal form of funding in terms of cost
Danish Policy – Energy Economics Energy Investment Danish policy after 1973 oil shock exposed energy insecurity Identify desired outcome eg heat, electricity, transport Identify solution with least carbon fuel input ie what happens in the system for each KwH of electricity or Mmbtu of heat produced? Energy return against energy invested – least energy cost solution Participants obliged to comply with policy against their financial interests
Synergetic Economic Behaviour Energy middlemen transition to energy service provision Minimises need for finance capital – replaced by human capital Least energy cost, rather than least £ cost Market tends to stability Common interest in minimising energy use Financing and funding costs minimised since no payment is made to rent-seekers Big Trade of the 21st Century Value of intellect (IP; skills) exchanged for value of carbon energy saved (ie optimisation of Exergy)
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