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Energy Pools - Scottish Energy Institute 11 11 2009
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Energy Pools - Scottish Energy Institute 11 11 2009

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  • 1. Energy Pooling A New Approach to Energy Investment Scottish Energy Institute Chris Cook , Glasgow 11 November 2009
  • 2. Peak Credit? - How did the Banking system go wrong?
  • 3. A Bank is a Credit Intermediary – or “Middleman” £ £ Bank Borrower Depositor
  • 4. But it does not lend pre-existing money….
  • 5. … .it creates new money as interest–bearing credit….
  • 6. … .which is then deposited back into the system
  • 7. Now, if you think about it, a bank’s true economic function….
  • 8. … is to guarantee – backed by shareholder capital - that the borrowers’ credit is good £ £ Bank Borrower Depositor
  • 9. Interest is charged for the use of the guarantee Interest Bank Borrowers
  • 10. ..from which Interest is paid to Depositors.. Interest Interest Bank Borrowers Depositors
  • 11. ..Default and Operating costs deducted... Interest Interest Costs Bank Borrowers Depositors
  • 12. ..and a profit to Investors normally results Interest Interest Costs Investors Dividend Bank Borrowers Depositors
  • 13. Banks create a pyramid of Credit, on a base of Equity Bank Credit Bank Equity
  • 14. Demand for Credit was so high…
  • 15. … .that Banks began to outsource their guarantee to rid themselves of risk.
  • 16. … and thus recycle their own Equity to support more credit creation
  • 17. Banks outsourced risk totally – through securitising debt and sale to investors….
  • 18. … temporarily – with Credit Derivatives (CDS - a time-limited guarantee)….
  • 19. … partially – using credit insurance from insurers such as AIG…
  • 20. … and radioactive cocktails of all three, like CDOs, structured finance and so on
  • 21. The Result was a bigger Credit Pyramid than Banks alone could sustain… Investor Equity Credit Bank Equity
  • 22. … and an opaque “shadow banking system” of Investors holding sliced and diced risk… Investor Equity Credit Bank Equity
  • 23. This pyramid of Credit funded the Mother of all Bubbles in US property prices….
  • 24. … and servicing this credit finally exceeded the financial capacity of the US population.
  • 25. About August 2007 – the point of Peak Credit – the Bubble started to deflate
  • 26. ..but by now no-one knew where the Risk was Investor Equity Credit Bank Equity
  • 27. Banks started to think, “if this is what our balance sheet looks like…..”
  • 28. “… what does everyone else’s look like?”
  • 29. The problem is not shortage of money - liquidity
  • 30. … .it is shortage of Equity - a solvency problem
  • 31. Bank Equity is eaten away by defaults
  • 32. Investors are licking their wounds…
  • 33. … and will not buy financial toxic waste any more
  • 34. The Result? Equity Credit
  • 35. Defaults drain money out of the system...
  • 36. … threatening a “deflationary spiral”
  • 37. So now where are we?
  • 38. Like a patient after a crash….
  • 39. … the visible wounds of the banks have been patched up…
  • 40. … .but internal bleeding continues from the ‘shadow bank’ loans
  • 41. … the patient needs surgery…..not the application of leeches
  • 42. QE is the transfusion of public credit which is keeping the patient alive
  • 43. However, no amount of Central Bank liquidity can make customers more creditworthy.…
  • 44. … because if debt cannot be paid then it will not be paid.…
  • 45. The solution cannot be monetary and must therefore be fiscal
  • 46. Switching taxation to wealth is politically impossible….
  • 47. Our proposed solution is a new approach to investment….a debt/equity swap
  • 48. There are conventionally two types of ownership - Public or Private ... 11/11/09
  • 49. ...and there are two ways of raising finance: Credit and Investment 11/11/09
  • 50. Investment through a Limited Company... 11/11/09
  • 51. ....a 19 th Century legal dinosaur... 11/11/09
  • 52. ...is what makes the Private Sector Private 11/11/09
  • 53. Credit is typically issued by banks and secured by legal claims 11/11/09
  • 54. ...giving two conflicting claims over the same productive asset 11/11/09
  • 55. But there’s a new furry animal out there.... 11/11/09
  • 56. ...the 21 st Century Limited Liability Partnership (LLP) 11/11/09
  • 57. A UK LLP is a corporate body with limited liability.... 11/11/09
  • 58. ...and.....errrr.....that’s it ! 11/11/09
  • 59. As far as the UK Tax Man is concerned it is a Partnership 11/11/09
  • 60. It’s an Open Corporate where partnership working is possible.... 11/11/09
  • 61. ... even without a written agreement 11/11/09
  • 62. It enables Direct “Peer to Peer” (P2P) Credit and Investment 11/11/09
  • 63. LLPs are now in pervasive use for purposes never intended... 11/11/09
  • 64. ...even in the Public Sector, where Glasgow has 4 municipal LLPs 11/11/09
  • 65. NET has developed the Capital Partnership Assets Investors Payment % % Use Managers Users Custodian
  • 66. Capital Partnership – direct Peer to Peer investment in productive assets 11/11/09
  • 67. 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 % % % % %
  • 68. Productive assets are held by a “Custodian”.. Assets Custodian Ownership
  • 69. … Investors put in Financial Capital in money, or “money’s worth”… Assets Investors Ownership Financial Capital Custodian
  • 70. … Managers provide Human Capital of time, expertise and experience.... Assets Investors Ownership Human Capital Financial Capital Managers Custodian
  • 71. ..Users pay for the use of Capital Assets Investors Payment % % Use Managers Users Custodian
  • 72. Generic Capital Partnership Framework Assets Investors Payment % % Use Managers Users Custodian
  • 73. Capital Partnership reinvents Equity
  • 74. Equity Shares - % age shares in revenues or production... 11/11/09
  • 75. … ..which may be transferred, but never redeemed, since there must always be 100%
  • 76. Units – Redeemable in production eg Kilo Watt Hours, natural gas
  • 77. Units have a value in exchange, but no rights to production or income over time…
  • 78. Asset-based on value provided by issuer...
  • 79. … .rather than deficit-based upon a claim over value issued by a Bank
  • 80. Let’s have a look at an Energy Pool for a wind turbine
  • 81. Two Phases – Development and Operation
  • 82. Development phase: firstly, a Custodian Assets Custodian Ownership
  • 83. Suppliers provide money’s worth Assets Suppliers Ownership Capital Equipment Custodian
  • 84. They may invest equipment & materials if they are willing and able
  • 85. ... but must invest agreed profit margin, thereby giving a stake in the outcome
  • 86. Investors provide risk capital for costs suppliers cannot or will not invest Assets Investors Ownership Risk Capital Custodian
  • 87. Managers provide Human Capital of time, expertise and experience Assets Investors Ownership Human Capital Financial Capital Managers Custodian
  • 88. ...and the turbine is installed
  • 89. Sounds great, but where does the money for the costs come from? 11/11/09
  • 90. Simple: the turbine creates a Pool of future production 11/11/09
  • 91. ...and from this Pool we sell Units to investors redeemable in payment for electricity... 11/11/09
  • 92. … at a discount to the market price 11/11/09
  • 93. Operation Phase Assets Payment Electricity Consumers Custodian
  • 94. Managers receive an Equity Share Assets Payment x% Electricity Managers Consumers Custodian
  • 95. Operation Phase Assets Investors Payment 100-x% x% Electricity Managers Consumers Custodian
  • 96. The Pool may now sell Units to consumers and risk averse investors 11/11/09
  • 97. Units - the Value Proposition 11/11/09
  • 98. Investors - a direct investment in energy with no return... 11/11/09
  • 99. ....similar to an investment in gold... 11/11/09
  • 100. ...except that while gold may be pretty... 11/11/09
  • 101. ....it’s not useful in the way that electricity is 11/11/09
  • 102. Consumers have the ability to lock in the price of future consumption 11/11/09
  • 103. Units are hybrid – analogous to a futures contract but no expiry date, and no ‘gearing’ 11/11/09
  • 104. Almost an Exchange Traded Fund Unit but redeemable in payment for energy 11/11/09
  • 105. What about Liquidity? Investors selling Units may not find Investor buyers.... 11/11/09
  • 106. No Problem! Consumers will buy if the Unit price falls below electricity market price... 11/11/09
  • 107. ...because they would profit by buying Units and redeeming them against consumption 11/11/09
  • 108. Energy Pool Mega Watts (Custodian) Unit Investors Consumers Equity Shares Managers, Communities electricity £ or Units Redeemed £ Units Units
  • 109. Interest-free financing through monetising renewable energy... 11/11/09
  • 110. ...by issuing - for value now - a Unit that will cost nothing to redeem 11/11/09
  • 111. Energy Pooling and Unitisation has further potential beyond funding new renewables 11/11/09
  • 112. Existing energy production may be unitised and refinanced interest-free..... 11/11/09
  • 113. … releasing funds for further investment 11/11/09
  • 114. Nega Watt e nergy savings - the cheapest energy of all – may be simply financed… 11/11/09
  • 115. … energy loans in KwH may be repaid via utility bills out of energy saved 11/11/09
  • 116. A £5k interest-free energy loan is 100 Units of 1 Mega Watt Hours sold for £50/MWh.... 11/11/09
  • 117. ....or 10,000 Units of 10 Kilo Watt Hours each sold for 50p 11/11/09
  • 118. A reduced bill is paid to the power supplier for energy actually used..... 11/11/09
  • 119. ...while Units are bought from the Pool to repay the energy loan 11/11/09
  • 120. A Carbon Levy on fuel may fund Energy Pool investment in renewable Mega Watts 11/11/09
  • 121. … and investment in energy saving Nega Watts 11/11/09
  • 122. Unitisation enables an energy dividend from a valuable carbon investment 11/11/09
  • 123. The outcome is that those with above average carbon use ...
  • 124. … .make a net transfer to those with below average carbon use
  • 125. Energy Pool offers a new approach to the Kyoto carbon markets....
  • 126. ...as invented by Enron...
  • 127. ...where the Emperor has no clothes
  • 128. Overheard at a traders’ conference.....
  • 129. “ If you want to keep a cow healthy, you don’t regulate what comes out of it……”
  • 130. “…… you regulate what goes in….”
  • 131. An Energy Pool enables a Carbon currency based upon the intrinsic value of energy…
  • 132. ..rather than a market in value-less Units of CO2 emissions, imposed by governments …
  • 133. … .and promoted by the same people who brought us the Credit Crunch
  • 134. The Energy Pool is not an Organisation ... 11/11/09
  • 135. ...it does not own anything, do anything, employ anyone, or contract with anyone... 11/11/09
  • 136. … .it is simply a framework for cross border energy investment
  • 137. It transcends borders through interactive consensual contrats de société ... 11/11/09
  • 138. ...rather than national or international institutions and hierarchies
  • 139. Energy Pool has no adversarial contractual relationships – contrats de mandat 11/11/09
  • 140. ...it requires no legislation..... Master Partnership Financial Capital (Money, IP etc) Users Custodians (National) % % € 11/11/09 Human Capital ( Developers, Operators)
  • 141. ...no public borrowing and no National Debt 11/11/09
  • 142. Thank You 11/11/09