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