politics of energy and the cost of carbon future

Politics of Energy and Cost of Carbon

Sheffield University

Chris Cook

28 September 2010

An Arab joke: “My father rode a camel”

“I drive a Hummer ....”

“My son flies a Falcon”

“But my grandson will ride a camel.”

Producers waste carbon energy on a cosmic scale because they value it incorrectly

Gas is too cheap to meter....

Nigeria's flared gas could power Brazil

Saudi Arabia uses 1.5 million barrels of oil a day on desalination alone

In Tehran, obsolete cars, minimal public transport and gasoline at 10 cents/litre...

....means air quality so bad...

....that even the crows are leaving

Energy subsidies by producers and developing nations cost trillions of dollars

Investment in the global transition to renewable energy requires trillions of dollars

The question is how to make the connection?

Mega Watts......from wind

.....any amount of solar energy

The real prize is the cheapest energy of all...NegaWatts...of energy savings

“You can't solve 21st Century problems with 20th Century solutions”...Dr Narsi Ghorban

There are conventionally two types of ownership - Public or Private...

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...and there are two ways of raising finance: Credit and Investment

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Investment through a Limited Company...

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....a 19th Century legal dinosaur...

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...is what makes the Private Sector Private

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Credit is typically issued by banks and secured by legal claims

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...giving two conflicting claims over the same productive asset

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But there’s a new furry animal out there....

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...the 21st Century Limited Liability Partnership (LLP)

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A UK LLP is a corporate body with limited liability....

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...and.....errrr.....that’s it !

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As far as the UK Tax Man is concerned it is a Partnership

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It’s an Open Corporate where

partnership working is possible....

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... even without a written agreement

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It enables Direct “Peer to Peer” (P2P) Credit and Investment

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LLPs are now in pervasive use for purposes never intended...

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...even in the Public Sector, where Glasgow has five municipal LLPs

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Introducing the Capital Partnership

AssetsAssets

Investors

Payment

% %

Custodian

Use

Managers

Users

Capital Partnership – direct Peer to Peer investment in productive assets

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Hilton Capital Partnership ( > £1bn)

Capital Partnership LLP10 UK Hotels

Gross Revenues

Hilton GroupCapital User

Consortium LLP Capital Provider

BankProperty

DeveloperHotel

Specialist

% %

%%%

Productive assets are held by a “Custodian”..

AssetsAssets CustodianCustodianOwnership

…Investors put in Financial Capital in money, or “money’s worth”…

AssetsAssets

Investors

CustodianOwnership

Financial Capital

…Managers provide Human Capital of time, expertise and experience....

AssetsAssets

Investors

CustodianOwnership

HumanCapital

Financial Capital

Managers

..Users pay for the use of Capital

AssetsAssets

Investors

Payment

% %

Custodian

Use

Managers

Users

Generic Capital Partnership Framework

AssetsAssets

Investors

Payment

% %

Custodian

Use

Managers

Users

Capital Partnership reinvents Equity

Equity Shares - % age shares in revenues or production

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Units – redeemable in payment for energy production eg Kilo Watt Hours, natural gas

Units have a value in exchange

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 ('Financing') and Operation ('Funding')

Development phase: firstly, a Custodian

AssetsAssets CustodianCustodianOwnership

Suppliers provide money’s worth

AssetsAssets

Suppliers

CustodianOwnership

CapitalEquipment

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

AssetsAssets

Investors

CustodianOwnership

Risk Capital

Managers provide Human Capital of time, expertise and experience

AssetsAssets

Investors

CustodianOwnership

HumanCapital

Financial Capital

Managers

...and the turbine is installed

Sounds great, but where does the money for the costs come from?

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Simple: the turbine creates a Pool of future production

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...and from this Pool we sell Units to investors redeemable in payment for electricity...

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… at a discount to the market price

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Operation Phase

AssetsAssets

Payment

Custodian

Electricity

Consumers

Managers receive an Equity Share

AssetsAssets

Payment

x%

Custodian

Electricity

Managers

Consumers

Operation Phase

AssetsAssets

Investors

Payment

100-x% x%

Custodian

Electricity

Managers

Consumers

The Pool may now sell Units to consumers and risk averse investors

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Units - the Value Proposition

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Investors - a direct investment in energy with no return...

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....similar to an investment in gold...

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...except that while gold may be pretty...

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....it’s not useful in the way that electricity is

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Consumers have the ability to lock in the price of future consumption

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Middlemen extracting profit become service providers sharing surplus

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What about Liquidity? Investors selling Units may not find Investor buyers....

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No Problem! Consumers will buy if the Unit price falls below electricity market price...

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...because they would profit by buying Units and redeeming them against

consumption

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Energy Pool

Mega Watts(Custodian)

Mega Watts(Custodian)

Unit Investors

Consumers

Equity SharesManagers, Communities

electricity £ or Units Redeemed

£

Units

Units

Interest-free financing through monetising renewable energy...

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...by issuing - for value now - a Unit that will cost nothing to redeem

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Energy Pooling and Unitisation has further potential beyond funding new renewables

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Existing energy production may be unitised and refinanced interest-free.....

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…releasing funds for further investment

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Nega Watt energy savings - the cheapest energy of all – may be simply financed…

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…energy loans in KwH may be repaid via utility bills out of energy saved

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A £5k interest-free energy loan is 100 Units of 1 Mega Watt Hours sold for £50/MWh....

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....or 10,000 Units of 10 Kilo Watt Hours each sold for 50p

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A reduced bill is paid to the power supplier for energy actually used.....

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...while Units are bought from the Pool to repay the energy loan

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A Carbon Levy on fuel may fund Energy Pool investment in renewable Mega Watts

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…and investment in energy saving Nega Watts

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Unitisation enables an energy dividend from a valuable carbon investment

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The outcome is that those with above average carbon use ...

….make a net transfer to those with below average carbon use

A Capital Partnership is not an Organisation

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It does not own anything, do anything, employ anyone, or contract with anyone

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It is simply a framework for cross border energy investment

It transcends borders through interactive consensual contrats de société...

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...rather than national or international institutions and hierarchies

There are no adversarial contractual relationships – contrats de mandat

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Capital Partnership requires no legislation

Master Partnership

Master Partnership

Financial Capital(Money, IP etc)

Financial Capital(Money, IP etc)

UsersUsers

Human Capital(Developers, Operators)

Custodians(National)

Custodians(National)

% %

€

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Unitising energy 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

Gas is homogeneous and Units would be regionally and globally acceptable in exchange

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Electricity Units – redeemable in payment for Kilo Watt Hours –are regionally acceptable

Other Units – redeemable in payment for carbon fuels - may be nationally acceptable

All may be priced against a Unit of measure – an Energy Standard....

...a fixed Unit of energy

Outcome: producer nations can massively increase domestic energy prices....

...without subsidy, inflation or fuel riots...

...through an Energy Dividend of Units

Populations may choose to waste energy and use valuable Units to pay for it

...or conserve energy and exchange Units for accommodation, food or goods

“Reality is defined by the questions you put to it”... J A Wheeler

Can we price Dollars in energy: rather than pricing energy in Dollars?

What would an energy economy look like?

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