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Energy Pools - Scottish Energy Institute 11 11 2009

Energy Pools - Scottish Energy Institute 11 11 2009






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    Energy Pools - Scottish Energy Institute 11 11 2009 Energy Pools - Scottish Energy Institute 11 11 2009 Presentation Transcript

    • Energy Pooling A New Approach to Energy Investment Scottish Energy Institute Chris Cook , Glasgow 11 November 2009
    • Peak Credit? - How did the Banking system go wrong?
    • A Bank is a Credit Intermediary – or “Middleman” £ £ Bank Borrower 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 £ £ Bank Borrower Depositor
    • Interest is charged for the use of the guarantee Interest Bank Borrowers
    • ..from which Interest is paid to Depositors.. Interest Interest Bank Borrowers Depositors
    • ..Default and Operating costs deducted... Interest Interest Costs Bank Borrowers Depositors
    • ..and a profit to Investors normally results Interest Interest Costs Investors Dividend Bank Borrowers Depositors
    • Banks create a pyramid of Credit, on a base of Equity Bank Credit Bank Equity
    • 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 Bank Equity
    • … and an opaque “shadow banking system” of Investors holding sliced and diced risk… Investor Equity Credit Bank Equity
    • 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 Bank Equity
    • 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 ... 11/11/09
    • ...and there are two ways of raising finance: Credit and Investment 11/11/09
    • Investment through a Limited Company... 11/11/09
    • ....a 19 th Century legal dinosaur... 11/11/09
    • ...is what makes the Private Sector Private 11/11/09
    • Credit is typically issued by banks and secured by legal claims 11/11/09
    • ...giving two conflicting claims over the same productive asset 11/11/09
    • But there’s a new furry animal out there.... 11/11/09
    • ...the 21 st Century Limited Liability Partnership (LLP) 11/11/09
    • A UK LLP is a corporate body with limited liability.... 11/11/09
    • ...and.....errrr.....that’s it ! 11/11/09
    • As far as the UK Tax Man is concerned it is a Partnership 11/11/09
    • It’s an Open Corporate where partnership working is possible.... 11/11/09
    • ... even without a written agreement 11/11/09
    • It enables Direct “Peer to Peer” (P2P) Credit and Investment 11/11/09
    • LLPs are now in pervasive use for purposes never intended... 11/11/09
    • ...even in the Public Sector, where Glasgow has 4 municipal LLPs 11/11/09
    • NET has developed the Capital Partnership Assets Investors Payment % % Use Managers Users Custodian
    • Capital Partnership – direct Peer to Peer investment in productive assets 11/11/09
    • Hilton Capital Partnership ( > £1bn) Capital Partnership LLP 10 UK Hotels Gross Revenues Hilton Group Capital User Consortium LLP Capital Provider Bank Property Developer Hotel Specialist % % % % %
    • Productive assets are held by a “Custodian”.. Assets Custodian Ownership
    • … Investors put in Financial Capital in money, or “money’s worth”… Assets Investors Ownership Financial Capital Custodian
    • … Managers provide Human Capital of time, expertise and experience.... Assets Investors Ownership Human Capital Financial Capital Managers Custodian
    • ..Users pay for the use of Capital Assets Investors Payment % % Use Managers Users Custodian
    • Generic Capital Partnership Framework Assets Investors Payment % % Use Managers Users Custodian
    • Capital Partnership reinvents Equity
    • Equity Shares - % age shares in revenues or production... 11/11/09
    • … ..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 Assets Custodian Ownership
    • Suppliers provide money’s worth Assets Suppliers Ownership Capital Equipment Custodian
    • 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 Assets Investors Ownership Risk Capital Custodian
    • Managers provide Human Capital of time, expertise and experience Assets Investors Ownership Human Capital Financial Capital Managers Custodian
    • ...and the turbine is installed
    • Sounds great, but where does the money for the costs come from? 11/11/09
    • Simple: the turbine creates a Pool of future production 11/11/09
    • ...and from this Pool we sell Units to investors redeemable in payment for electricity... 11/11/09
    • … at a discount to the market price 11/11/09
    • Operation Phase Assets Payment Electricity Consumers Custodian
    • Managers receive an Equity Share Assets Payment x% Electricity Managers Consumers Custodian
    • Operation Phase Assets Investors Payment 100-x% x% Electricity Managers Consumers Custodian
    • The Pool may now sell Units to consumers and risk averse investors 11/11/09
    • Units - the Value Proposition 11/11/09
    • Investors - a direct investment in energy with no return... 11/11/09
    • ....similar to an investment in gold... 11/11/09
    • ...except that while gold may be pretty... 11/11/09
    • ....it’s not useful in the way that electricity is 11/11/09
    • Consumers have the ability to lock in the price of future consumption 11/11/09
    • Units are hybrid – analogous to a futures contract but no expiry date, and no ‘gearing’ 11/11/09
    • Almost an Exchange Traded Fund Unit but redeemable in payment for energy 11/11/09
    • What about Liquidity? Investors selling Units may not find Investor buyers.... 11/11/09
    • No Problem! Consumers will buy if the Unit price falls below electricity market price... 11/11/09
    • ...because they would profit by buying Units and redeeming them against consumption 11/11/09
    • Energy Pool Mega Watts (Custodian) Unit Investors Consumers Equity Shares Managers, Communities electricity £ or Units Redeemed £ Units Units
    • Interest-free financing through monetising renewable energy... 11/11/09
    • ...by issuing - for value now - a Unit that will cost nothing to redeem 11/11/09
    • Energy Pooling and Unitisation has further potential beyond funding new renewables 11/11/09
    • Existing energy production may be unitised and refinanced interest-free..... 11/11/09
    • … releasing funds for further investment 11/11/09
    • Nega Watt e nergy savings - the cheapest energy of all – may be simply financed… 11/11/09
    • … energy loans in KwH may be repaid via utility bills out of energy saved 11/11/09
    • A £5k interest-free energy loan is 100 Units of 1 Mega Watt Hours sold for £50/MWh.... 11/11/09
    • ....or 10,000 Units of 10 Kilo Watt Hours each sold for 50p 11/11/09
    • A reduced bill is paid to the power supplier for energy actually used..... 11/11/09
    • ...while Units are bought from the Pool to repay the energy loan 11/11/09
    • A Carbon Levy on fuel may fund Energy Pool investment in renewable Mega Watts 11/11/09
    • … and investment in energy saving Nega Watts 11/11/09
    • Unitisation enables an energy dividend from a valuable carbon investment 11/11/09
    • 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 ... 11/11/09
    • ...it does not own anything, do anything, employ anyone, or contract with anyone... 11/11/09
    • … .it is simply a framework for cross border energy investment
    • It transcends borders through interactive consensual contrats de société ... 11/11/09
    • ...rather than national or international institutions and hierarchies
    • Energy Pool has no adversarial contractual relationships – contrats de mandat 11/11/09
    • ...it requires no legislation..... Master Partnership Financial Capital (Money, IP etc) Users Custodians (National) % % € 11/11/09 Human Capital ( Developers, Operators)
    • ...no public borrowing and no National Debt 11/11/09
    • Thank You 11/11/09