Transcript Ethical is Optimal

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”
Borrower
Depositor
Bank
£
£
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
Borrowers
Interest
Bank
..from which Interest is paid to Depositors..
Borrowers
Interest
Interest
Bank
Depositors
..Default and Operating costs deducted...
Borrowers
Interest
Costs
Interest
Bank
Depositors
..and a profit to Investors normally results
Borrowers
Interest
Costs
Interest
Bank
Investors
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…
Credit
Investor
Equity
Bank
Equity
…and an opaque “shadow banking system” of
Investors holding “sliced and diced” risk…
Credit
Investor
Equity
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…
Credit
Investor
Equity
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?
Credit
Equity
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
Gross
Revenues
Units
Unit
Investors
Income Trust
%
%
Costs
Corporation
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
Ownership
Custodian
…Investors put in Financial Capital in
money, or “money’s worth”…
Assets
Financial
Capital
Investors
Ownership
Custodian
…Managers put in Human Capital of time,
expertise and experience....
Assets
Financial
Capital
Investors
Ownership
Human
Capital
Managers
Custodian
…and Users pay for the use of this Capital…
Users
Payment
Use
Assets
%
Investors
Custodian
%
Managers
…the result is a “Capital Partnership”
Users
Assets
Investors
Custodian
Managers
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 assetbased 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
Community
Energy
Turbine
Energy
Investors
Custodian
Energy
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
Community
£
Units
CHP
£
Investors
Units
Custodian
£
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….
Investor
Units
Management Equity
Community Equity
A Carbon Pool….
Energy Users
£ Levy
Units
Carbon Pool
£
Investors
Units
Custodian
% of Units
Managers
….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,