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Financing energybeyond Peak Credit
 

Financing energybeyond Peak Credit

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    Financing energybeyond Peak Credit Financing energybeyond Peak Credit Presentation Transcript

    • Beyond Peak Credit A New Approach to Energy Investment Chris Cook Claverton 25/26 October 2008
    • We live in Interesting Times…..
    • … .some say, “the end of the financial system as we know it”
    • Most people have now heard of Peak Oil....
    • … .but last year we reached the point of Peak Credit....
    • A Green New Deal has been proposed...
    • .....to achieve the massive investment in energy infrastructure we need....
    • ...but this proposal is still based upon an unsustainable financial system….
    • … where Money is Debt....
    • Where did it all 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 that the borrowers’ credit is good…
    • 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 Bank Borrowers Depositors
    • So Banks create a Pyramid of Credit, on a base of Equity Bank Credit Bank Equity
    • Demand for Credit has been so high…
    • … .that Banks began to “outsource” their guarantee to rid themselves of risk.
    • … and thus allow Equity to support more credit creation
    • Banks outsourced risk totally – through “securitising” debt and sale to investors….
    • … temporarily – with “Credit Derivatives” (a time-limited guarantee)….
    • … and partially – using credit insurance from insurers such as AIG
    • The Result is 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 extended 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.
    • … the point of Peak Credit ....
    • In August 2007, the Bubble started to deflate and attention turned at last to defaults …
    • ..but by now no-one knew where the Risk lay… 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…..?”
    • ...and Banks stopped lending to each other ...
    • The problem is not shortage of money - liquidity – Central Banks can handle that….
    • … ..it is shortage of Equity - a Solvency problem – which Central Banks cannot handle…..
    • Bank Equity is being eaten away by defaults….
    • … and Investors will not recapitalise the shadow banking system...
    • The Result? Equity Credit
    • So, Credit is becoming both scarce and expensive….
    • … Central Banks are irrelevant….
    • … and further defaults will destroy yet more Bank Equity…..
    • … .and drain money out of the system in a “deflationary spiral”....
    • … .leading inevitably to a Depression....
    • So much for the Credit Crunch problem
    • Clearly the solution cannot lie in creating more credit
    • So we will take a new approach to “Equity” investment instead.
    • Conventional Equity consists of shares in a Limited Company or “Corporation”….
    • Ownership by a Corporation is what makes the “Private Sector” Private
    • While the Corporation may be conventional, it is not the only enterprise model there is
    • While all eyes have been on Credit innovation…
    • …” Asset-based” finance has been developing “under the radar”….
    • Canadian “Income Trusts” use a Trust law framework to “unitise” gross Corporate revenues….
    • Income Trust Income Trust Corporation Gross Revenues Unit Investors % % Units Costs Dividends?
    • Units are sold to risk averse investors such as pension funds…
    • … who consider investment less risky if they access corporate revenues…
    • … . before the management does….
    • We are also seeing new asset classes such as Exchange Traded Funds (“ETF’s”)….
    • … Real Estate Investment Trusts (“REIT’s”)…
    • … Hedge Funds constituted as Limited Partnerships…
    • … and of course….”Sukuks”
    • In 2001 the UK introduced the Limited Liability Partnership (“LLP”) – not in fact, a “Partnership”
    • … but simply an infinitely flexible corporate form – an “Open” Corporate ......
    • … enabling a Capital Partnership....
    • 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 put in Human Capital of time, expertise and experience.... Assets Investors Managers Ownership Human Capital Financial Capital Custodian
    • … and Users pay for the use of this Capital… Assets Investors Users Payment Managers % % Use Custodian
    • … the result is a “Capital Partnership” Assets Investors Users Managers Custodian
    • A “Capital Partnership” enables new forms of Equity…
    • (a) Equity Share Units - proportional (%age) ”n’ths” such as billionths.....
    • … ..which may be bought and sold, but never redeemed, because there must always be 100%
    • (b) Redeemable Units – eg Kilo Watt Hours; rights to occupy 1 hectare of land for a year….
    • Such Units have a value in exchange, but carry no rights to production or income over time…
    • They hold their value because they are asset-based on value provided by the issuer …
    • … .rather than being deficit-based upon a claim over value issued by a Bank
    • Let’s have a look at how an Energy Partnership might work.....
    • Imagine that a community wishes to build a wind turbine...
    • Energy Pool Custodian Energy Energy Energy Turbine Investors Community Managers
    • Managers are entitled to a %age of production
    • Investors provide development Capital by purchasing redeemable Units
    • Contractors may invest equipment & materials but must invest their agreed profit margin
    • Contractors’ costs are covered by selling Units from the “Production Pool” to investors...
    • If electricity price rises, Investors gain and community foregoes part of the profit…
    • ..if prices fall, community has locked in the price and Investors lose....
    • Imagine that a community wishes to retrofit combined heat and power....
    • Heat Pool Custodian Units Units £ £ £ CHP Investors Community Managers
    • A Pool or Fund is created and invested in CHP and a heat network....
    • ....properties are subject to a “Hot Water Rate” which is paid into the Heat Pool....
    • ....at a suitable market price...
    • Finance is raised by Unitising future energy production or heat savings…
    • … replacing conventional secured debt with a new form of redeemable Equity...
    • … and the Pyramid of Risk is very different…. Management Equity Investor Units Community Equity
    • A Carbon Pool…. Carbon Pool Energy Users Managers Custodian Units % of Units Units £ Levy £ Investors
    • … .is created by a carbon levy and the fund is unitised at an initial market price....
    • … .interest free investment is then made in Energy Pools (renewable Mega Watts)...
    • … .and in Heat Pools (NegaWatts – the cheapest energy of all) - eg retrofitting CHP...
    • … .where interest-free investment is repaid by purchasing Units from the Pool...
    • … .funded by energy savings made....
    • Units in the Carbon Pool are distributed fairly to energy consumers generally...
    • … .who may redeem them against energy used...
    • … .or to repay investment (interest-free energy loans...) in energy efficiency...
    • … .or simply sell them at the market price...
    • The outcome is that those with above average carbon use ...
    • … .make a net transfer to those with below average carbon use ...
    • A Carbon 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 designed by the same people who brought us the Credit Crunch….
    • A trader’s metaphor illustrates the fundamental uselessness of a deficit-based carbon currency…
    • “ If you want to keep a cow healthy, you don’t regulate what comes out of it……
    • “…… you regulate what goes in….”
    • Thank You,