Financial Resilience - Energy as a Service

1. Financial Resilience
Energy as a Service
Chris Cook, Bogazici University
Istanbul 30th November 2017

2. Dawn of the Oil Market - 1973 Oil Shock

3. Oil Market 1.0 – Era of Middlemen

4. Oil as a Commodity
Producers seek stable, transparent, high prices:
consumers seek stable, transparent low prices
Middlemen risk finance capital to “buy cheap, and sell
dear” in order to make a transaction profit
For Middlemen, stability and transparency of prices is
the enemy of profit

5. Oil Market 1.0 – Oil as a Commodity
Oil as a Commodity

6. Financialisation and Passive Investment
Active Investment - ('Speculation')
- putting capital at risk for transaction profit
– two way (long or short)
Passive Investment - ('Inflation Hedging')
- off-load dollar risk for commodity risk
- one way 'long only' (buy forward)
Producer Hedging
- off-load commodity risk for dollar risk
- one way short only (sell forward)

7. Oil as an Asset
Passive investors aim to avoid loss – 'hedge inflation'
Sovereign Wealth Funds; Pension Funds Exchange
Traded Funds & Index Funds
Quasi-ownership (not debt/derivative) Energy as an
Asset
Middlemen keep credit risk but do not take market risk
& they profit from privileged (asymmetric) information

8. Oil Market 2.0 – Oil as an Asset
Oil as an Asset
(Financial Bubble)
Oil as a Commodity

9. Physical & Financial Markets Compared

10. Oil as a Weapon
History does not repeat itself, but it does rhyme

High cost shale crude oil was viable/bankable because
oil prices were supported for 5 years above $80/barrel

Demand for oil products also fell due to efficiency

Renewable energy substituted for carbon fuels
Stone Age did not end because of a shortage of stones

US oil swing producer & security of supply. At a price

Declining energy return on energy invested

11. Oil Market 3.0 – Oil as a Weapon
Oil as an Asset
(Financial Bubble)
Oil as a Weapon
(Manipulation)
Oil as a Commodity

12. Energy Dominance
On July 1st
2017 Saudi ceased ICE BWAVE pricing & priced
against ICE Brent settlement price
Oil price immediately rose by 35% to $60bbl where US shale oil
exports act to cap the price - “Swing Producer”...on autopilot!
Price supported by Saudi reserves (T-Bills) & Fed liquidity
US is directly monetising US oil reserves, backed by Saudi oil
reserves

13. Energy Dominance – Planned Outcomes
Two Tier Market in Crude Oil
US, Saudi & friends have privileged market access: others
have inferior or no access
China are immune to US sanctions & act as Buyer of Last
Resort
Petrodollar ($ backed by T-Bills) gives way to direct prepay
monetisation of reserves – an Oil Standard for the dollar

14. Oil Market 4.0 – Oil as Money
Oil as an Asset
(Financial Bubble)
Oil as a Weapon
(Manipulation)
Oil as a Commodity
July 1st
2017
Energy Dominance

15. 1973 Oil Shock – Danish Resilience Solution

16. Resource Resilience – the Case of Denmark
Since 1980 Denmark's GDP rose 78%
Energy use has been stable
Carbon fuel use has declined
How did Denmark achieve this?

17. Energy as a Service
Oil, gas, petroleum products, even electricity may be
commoditised, bought & sold for profit
But consumers do not use commodities: they use
heat/cooling, light, power, mobility delivered as a
service
1717

18. Resource Resilience – mandated Organising Principle
Least Carbon Fuel Cost Principle
- mandated minimum carbon fuel input for a given use
of energy as a service
- investment in renewables, heat/cooling, transport,
energy efficiency

19. 40 Years Later - Outcomes in Denmark
- Decentralisation
- Human resilience – skills/knowledge base and
knowhow: eg Vestas is the biggest global wind
turbine manufacturer......in a country of 6m people
- trend to energy security and energy independence
- reduction in carbon use (& so also CO2 emissions ! )

20. Denmark – an emerging Natural Grid

21. Financial Resilience
Two elements: Instruments & Institutions
Instruments

Energy Swap - neutral, collaborative framework
for allocation of energy flows

Energy Credit - prepayment for energy
production or use
Institutions

Capital Partnership – production/cost sharing

Guarantee Society – risk sharing/mutual
assurance

22. Prepay Credit Instruments
Prepaid
Talk Time
Prepaid
Taxation
Prepaid
Energy

23. Energy Credit (Prepay)
What it is
- Promise issued by energy producer in exchange for value
received
- Returnable in payment for supply
What it is not
- Debt - no right to demand money
- Derivative – no right to demand delivery
- Equity – no ownership right in respect of energy assets
Requires trust framework for Promissors & Investors

24. Energy Loans – the Value Proposition
Producer
- sells energy forward and locks in price
- interest-free energy loan until credit returned vs supply
Consumer
- prepays for energy and locks in price
Investor
- direct 'inflation hedge' investment in energy
- Consumers buy credits from Investors at best price
below physical energy price & return against supply

25. Development Financing
Development - $1.00's worth of value of future energy
sold for 80c gives absolute return of 25%
Rate of Return - rate over time at which prepay credit
returned to issuer for use of completed asset
Rate not fixed - depends on existence & amount of flow

26. Energy Loans – Long Term Funding
Prepay - direct investment in future energy production
or energy savings
- the earlier the investment, the greater the risk, and the
greater the discount
- return in energy: no $ paid for the use of $
- a simple but optimal new (ethical) asset class

27. Energy Swaps
Regional Swaps
- Energy delivered to one location exchanged for energy
delivered from another eg Caspian Oil Swap
Category Swaps
- Flows of one type of energy exchanged for flows of
another
Hybrid
- Regional Category Swaps

28. Energy Swaps
Producer supplies flow of oil or natural gas
Producer agrees proportional shares of product or service
output with service providers & consumers
Balance of output is available to investors
Investment may be conventional (eg $/€ bank loans) or
unconventional (energy loans of prepay energy credits)

29. Energy Swaps
Producer supplies flow of oil or natural gas
Producer agrees proportional shares of product or service
output with service providers & consumers
Balance of output is available to investors
Investment may be conventional (eg $/€ bank loans) or
unconventional (energy loans of prepay energy credits)

30. Oil for Product Swap
RefineryRefinery
Investors
Consumers
Service
Providers
%Prepaid
Products
Oil
National Oil
Company (NOC)
Products

31. Energy-as-a-Service – Value Propositions
Producers & Consumers - share infrastructure cost
Service Providers - receive agreed %age of revenues -
balance of revenues available to investors
Investors - buy prepay credits & so make energy loans
Consumers – pay for energy used either with conventional
currency eg $ or energy prepay credits

32. Caspian Energy Grid Concept
21st
Century Caspian Energy Grid
Least Carbon Fuel Cost Principle
Smart Grid – optimises supply & demand
Smart Market – energy is dispatched on least carbon fuel
cost basis not least $, € or £ cost basis
Integration of physical & market networks

33. Marchwood (UK - 58% efficient CCGT)

34. BritNed and NorNed HVDC Links
BritNed 260km - 600MW NorNed 580km - 600MW

35. Caspian Energy Grid – KAT Core
Turkmen Gas/
Power Hub

36. James Watt Steam Engine
Newcomen Atmospheric Engine James Watt Steam Engine

37. James Watt & the first Smart Energy Trade
James Watt's steam engine was much more efficient at
pumping water than Newcomen's Atmospheric Engine
James Watt agreed that he would receive one third of the
coal saved in pumping water (ie Nega Tonnes of coal)
First Smart Energy Trade – Intellectual value exchanged
for the value of carbon fuel savings
Not pumps-as-a-commodity - Pumping-as-a-Service

38. The Smart Trade
Smart Trade is exchange of intellectual value for value of
carbon fuel savings – IP/Technology carbon fuel swap
Long term funding will be through energy loans eg natural
gas loans repaid at market value of natural gas savings
Investors in energy loans – sovereign wealth funds and
reserves, pension funds

39. CNG for Transport Swap
Vehicle Companies
(eg taxis & buses)
Vehicle Companies
(eg taxis & buses)
Investors
Transport
Users
Service
Providers
%Prepay
Natural
Gas
NIGC
Transport as
a Service
%
% Pay

40. CNG Transport-as-a-Service
Gas producers supply gas & receive %age share of
transport revenues
Manufacturers & service providers supply equipment,
vehicles, services for %share of transport revenues
Investors - buy prepay transport/mobility credits
Consumers – pay for transport use either with conventional
currency eg $ or prepay mobility credits

41. Outcome - Transition through Gas
Optimal low carbon financing & funding via Energy Loan
direct investment in carbon fuel savings
Payment of subsidies through Energy Dividend of energy
credits
Least carbon fuel cost principle minimises CO2 emissions:
higher the carbon fuel price, the more $ profit in saving it
Instead of oil priced in $ (or €) and gas indexed against oil,
dollars, euros & oil are priced in energy value of gas

42. Outcome – Energy denominated Carbon Credits
“If you wish to keep a cow healthy you don't regulate what comes
out of the cow, you regulate what goes in”

43. Levy/Dividend replaces Energy Subsidy
Energy dividend made in energy credits not bank-
issued credits
- incentive to save energy
- not inflationary
- savings may be used to invest through energy loans
- credits returned in payment for energy as a service

44. Outcome – Smart Market
Conventional Smart Grid involves smart management
of connected grid supply and demand
But – power dispatched using least $ cost ranking order
In a networked market of energy swaps & credits power
dispatched using least carbon fuel cost ranking order
Outcome – Smart Market

45. 21st
Century Problems cannot be solved by 20th
Century Solutions

46. …....21st
century solutions pre-date modern finance