But what I found most interesting is that this represents the newest attempt at scaring Europeans with unfriendly countries apparently bent on dominating our energy supplies.
But where is the LNG going to come from anyway? Unfriendly countries? En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
Not much to ask is it? "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
but i believe Chris is talking about this as a piece of a very long-term strategy of changing the nature of finance... "Life shrinks or expands in proportion to one's courage." - Anaïs Nin
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
God preserve us from European institutions, monopolies (whether State or private) and hierarchies. I see the future in a neutral and networked Public/Private enterprise model for utilities within a partnership framework, and I have outlined this exhaustively here and elsewhere.
As for discount rates, current methodology is only relevant if you insist upon using deficit-based fiat money for financing, rather than monetising energy.
Deficit-based financing is the problem, not the solution, but that is something you do not see, probably because it is an existential issue for a banker. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
But I still fail to see your existential objection to project finance, where you finance a well identified asset, and get repaid only from the income of that asset over a known period of time. It's self contained and pays for itself - no money is created over the full cycle - at least not more than is permitted by the value created by the project, in the form of interest for the lenders and income/dividends for the investors.
You do need a discount rate to compare projects that have different capital investment and running cost profiles, whether you express that in monetary terms or energy units. How do you compare an energy unit today to an energy unit tomorrow? In the long run, we're all dead. John Maynard Keynes
It's not project finance I object to at all. I have a very high regard for the work that you do. It's deficit-based money-as-debt which I see as the problem, and I just think you are being let down by the raw material you use.
The flow of energy which derives from (say) a wind turbine has an intrinsic "use value" in exchange for which investors are prepared to pay value now.
Energy investment eg Exchange Traded Funds (ETFs and ETCs) are a massive asset-class, and can only get bigger. But there are huge problems with the current participation of these funds in conventional futures and OTC contract markets. I am proposing what are essentially ETF/ETC Units redeemable in payment for energy supplied. These are also identical in effect to a futures contract which is undated, and 100% margined.
ie a Unit holder has no right to delivery, but he has a right use a Unit as settlement for energy consumed.
When an "Energy Pool" flow is merely an expected flow from a future turbine then the certainty of achieving that flow is a lot less than when the asset is complete and producing.
As you know better than anyone.
So the value of a Unit (issued by the would-be producing entity) redeemable in (say) 1 Mega Watt Hour of production will be much lower at the development stage than it will be once the turbine is up and running. The difference is the reward for the development risk taken on by the investor.
Jerome a Paris:
How do you compare an energy unit today to an energy unit tomorrow?
That question is answered every second in the energy futures market. It is a question of investors' view of the price of energy at a future point in time, and its relationship with fiat monetary units, particularly dollars.
The beauty of unitising/monetising energy for renewables and energy savings is that it enables value to be received now in exchange for Units which will cost nothing to redeem in the future. The redeemability of a Unit allows the physical market and the market in Units to converge, while otherwise detaching the financial market from the physical market.
End of market manipulation, although there is a need for monetary discipline, due diligencem, risk management and all the skills you would bring to the table as a service provider rather than as an intermediary.
I believe that it is possible to "unitise" existing production, and thereby to release a massive pool of development credit for reinvestment in new production.
The process requires the skills you have,and the architecture I have developed, and it is capable of financing the transition from carbon-based fuels to renewable energy and energy savings (Nega Watts). it means that the only capital your bank needs is that necessary to cover operating costs.
The proposed market in carbon credits and CO2 are both based upon monetising something intrinsically worthless, and it is not surprising therefore that this is the method of choice of those who brought us the credit crunch. These mechanisms are neither sustainable nor necessary
I touched upon this in my last post at Labour List Gasline Allies or Gasoline Alleys "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
It is a question of investors' view of the price of energy at a future point in time, and its relationship with fiat monetary units, particularly dollars.
You thus accept a private investor driven discount rate determination, ie a market rate, which will always be higher than a public sector driven rate.
By this simple innocuous decision, you've just switched the market from building wind to building gas-fired power plants. In the long run, we're all dead. John Maynard Keynes
There's a big difference between a consumer/investor and an investor purely for profit.
A speculator/rentier Investor in Units who wishes to sell may find there is no Investor wishing to buy at a "For profit" market price. But the redeemability of a Unit means that if the price drops below the physical market price then Consumers will buy either for immediate consumption or possibly for future consumption and this fact competely changes the game.
A Consumer buyer is hedging consumption and energy price inflation. His motive is not profit maximisation but loss minimisation.
The motive of rentiers to maximise profit denominated in fiat money is, on the other hand, one of the principal causes of inflation - by definition.
The same point - of energy price risk versus fiat money price risk - lies behind the misunderstanding by US politicians and regulators concerning the role of ETF's in commodity markets. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Whether it is redeemable in energy or not does not change the fact that 1kWh today is worth more than 1kWh tomorrow, even if in a perfectly tradeable or liquid or usable instrument. By how much IS influenced by the very fact that it's a tradeable instrument. In the long run, we're all dead. John Maynard Keynes
An Investor's time horizon does not come into it either, but the Issuer's does, because he will need to ensure that he is in a position to redeem Units against energy he has delivered and still have enough fiat money left for his costs.
That will mean that he buys Units himself from the Pool to amortise the depreciation of his energy producing asset, or as a sinking fund for re-powering etc etc
By how much IS influenced by the very fact that it's a tradeable instrument.
The tradability of a Unit in an Energy Pool does not affect the physical market price of electricity, today or in the future, any more than if I were to bet you that the price would rise or fall.
A Unit is a store of value - a unit of currency based upon the use value of energy. The physical market price affects the Unit price - but not vice versa. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
But the creditworthiness of the Unit Issuer does come into it. Namely, the ability of all the units to be redeemed on demand at a time of the Unit holder's choice.
Suppose 10 units are produced per month, and 120 units are issued at the start of the year. Suppose that 20 different investors buy 6 units each and all of them want to redeem one unit at the end of January. What happens? En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
It is the capability of the Issuer to deliver that is in question. There's nothing new in performance risk. I spent six years managing IPE Gas Oil contract deliveries where sellers were only too happy to wriggle out of contracts in a rising market if they could.
The Pool would require a "framework of trust" (ie the mutual guarantee agreement I call a Guarantee Society) and this could be backed by provisions made into the Pool.
Liquidity is an issue of course, but the bigger the Pool, the greater the liquidity.
The Pool would also require a development/management service provider consortium. Which includes a role for providers of financial services like Jerome and your good self, of course. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
All but the auction are an invitation to speculators to start playing games. If you draw lots or redeem on a first-come-first-served basis, you're inviting a second-hand market, which would work just like the forwards market does today, except with even less oversight.
If you continuously revalue and devalue the units, you're rewarding people based on how well their use pattern tallies with production patterns and how poorly it tallies with predicted aggregate use patterns. Which may not be a bad idea, but needs to be considered.
If you auction the right to redeem units without revaluing and devaluing units, then you've just re-created the current forward market.
From where I'm sitting, it would make a lot more sense to simply ban anybody who doesn't have the capability to make or take delivery from operating in the forwards and future markets. Those markets are there to serve as a gathering place for people who want to buy and sell stuff - people who wish to gamble can avail themselves of our perfectly good casinos, which are there for precisely this purpose.
So if the twenty people all want to redeem one unit at the end of January, how do you decide who can redeem their units?
I already answered this in response to migeru. Units can only be redeemed against consumption as an alternative to making payment using fiat money.
Price formation in the physical market - now that's a different issue, and I think that periodic auctions along the lines of the London Bullion Fix have a lot to commend them.
There was a thread covering that subject a while ago. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Break it down for me, using small words.
If all you have is a redeemable scrip with a face value of 1 unit, you can't have an auction.
I don't know whether you can even have an auction if there is some redeemable unit-valued scrip left outstanding because if I hold the unit I can always outbid everyone else (if you bid €10 I can bid €11 and then pay with one unit of scrip rather than cash) but if there are two units of scrip outstanding there can be no winning bid.
I guess you can always do it pro-rata. You specify that any scrip presented on the third friday of the month before close of business will be redeemed pro-rata at auction before any cash bids. You also specify that you'll be putting up for auction no less than a set amount of units of production (in my example, 10 per month). En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
If the Unit market price is above the physical market price then a consumer will not buy Units to redeem them, since fiat money is cheaper to use.
He will buy as many Units at the exact physical market price as he can use in the spot period. He may buy more Units if the price is below the market price and he has a future use for Units, but the price he pays will reflect both fiat money interest rates to the expected date of redemption, and expected energy price inflation.
Scrip is presented bilaterally to your supplier if that is in your interest. There is no need for an auction. You cannot redeem more Units than you have had energy in supply. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
A banknote is undated, too: it's just that it is redeemable for....errrr....another banknote. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Money is just a ritualised IOU.
collect taxes by weight of manure.
Best description of a market economy ever.
Say you have a Unit redeemable for 10 Kilo Watt Hours in electricity. That will be accepted in settlement of electricity supplied by any supplier member of the Pool.
If they didn't issue it themselves they will present it to whoever did and be credited with 10 Kilo Watt Hours, or be paid in cash at the physical market price.
JakeS:
Suppose that I have an apple unit that I bought a while ago, and I want to get my apple now. What do I do?
This Unit does not entitle you to delivery of the apple, but is prepayment for an apple.
You buy the apple from the supplier, if he has any, and present your Unit in payment, if you wish. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Or if you've bought an energy unit, you could still be sitting in the dark?
How is this a benefit?
Having a Zimbabwean Pound today can only buy you an apple if there are apples available.
Tomorrow the apples will probably still be available but now it may take ten Zims to buy one.
An apple Unit on the other hand, would still be redeemable for the apple, but maybe not that much else.
I suspect that a Unit issued by a credible operator and redeemable in 10 Kilo Watt Hours, or maybe a Unit redeemable for an hour of Zimtel talk time; or a Unit redeemable in Zim land rental value, would remain fairly constant against apples too, even though the fiat Zim is fucked. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Someone I knew who was in the top team at Orange a few years ago told me that the Egyptian Central Bank forced their local operation to cease issuing their highest value phone cards because they were being increasingly used as currency, since they held their value better than the official currency at the time. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Electricity is an infrastructure business.
There's still no reason why Unitisation could not be used as a complementary funding mechanism to conventional debt and equity.
Indeed, as a "one time" conversion, unitisation within a partnership framework could release enormous value.
And the result would be an enterprise model that works, and keeps on working, for the benefit of all stakeholders, and not distorted for the benefit of unproductive rentiers. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
And this is especially the case with electricity kWh, which can almost not be stored, and whose timeliness value is extremely high? In the long run, we're all dead. John Maynard Keynes
I believe that this redeemability connects the physical and the financial in a way that allows a new approach to investment, and indeed, offers a basis for a regional and even global reserve currency. Units redeemable in carbon energy could be a transitional - globally fungible - currency.
It is only through basing exchanges on an energy standard, (ie energy accounting), I think, that we can make the transition to renewables.
An economy founded on money-as-debt and with value extracting intermediaries operating "For profit" is the cause of the problem, not the solution. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The value difference between the two is so volatile as to completely negate the usefulness of the units. They would become pure speculative plays on the immediate balance of the electricity grid, and that function will pollute any other that you might want it to play. In the long run, we're all dead. John Maynard Keynes
So the plan is to create local energy pools at the micro level (private wire obviously as with Woking), and I have a twin turbine municipal scheme on the stocks, with almost all the permissions done.
At the macro level, an Energy Pool could work for (say) the North Sea (where a cross border legal framework exists) or the Caspian Sea, where it does not, as far as I know.
Retail customer prices do not in fact change much - and Units are primarily a retail product on the one hand, but when aggregated become wholesale financing on the other. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The current European electricity network carries alternating current over distances that are measured in the order of a thousand km. And a future European supergrid will carry direct current even farther. While at the same time load-balancing continuously. In other words, the electric grid is not local, and electricity is not storeable. Oil exchanges, which is where I believe you have most of your experience, deals with a commodity that is both local and storeable.
This is not hair-splitting. Even if your scheme works for oil, apples or grain, there is no way, short of direct divine intervention, that a distribution scheme adapted to local, storeable goods will perform satisfactorily for non-local, non-storeable goods.
It is the profit motive that leads to the negative outcome in the former case, and the nature of the State as an organisation, combined with the defects of representative democracy, in the latter.
IMHO the optimal enterprise model for an infrastructure utility is neither Public = State, nor Private = For rentier Profit but a networked cooperative of cooperatives. ie a partnership framework for Peer to Peer interaction between producer and consumer.
I set out my conclusions here in 2001 and a blueprint for a Market 3.0
This analysis is now being picked up by influential thinkers such as Michel Bauwens, and others. If you can refute it, I would be interested to read your critique, and your alternative view of the next generation of markets.
I identified and developed in 1998/9 - through a Dot Com I founded - what was essentially a new utility function. ie generic transaction registration. It took years to realise that the problem was that there was no adequate enterprise model for such a utility, or indeed, for any utility.
Many years, and much analysis and development later, I believe that not only could a partnership-based utility model be created but it is, I submit, in the interests of States and Shareholders alike for public and private utilities to use such a model.
And btw, Jake, I spent years working on the emerging electricity and gas markets while at IPE, and remember discussing clearing in Oslo with Nordpool when they were still recording transactions on a white board.
I think I know what works, what doesn't work, and more to the point I now have a pretty shrewd idea WHY it doesn't work, market by market.
And if you require a rationale for unitising electricity you might try reading someone who has essentially done it just to show that it's possible. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Units redeemable in underlying value do not concern securing supply. They secure price, and have no effect on supply.
They are a means of payment complementary to fiat currency - and a genuine store of value, which is why they will be hugely successful in a way that commodity ETFs (ETCs) can never be.
Unitisation is pretty trivial - supermarkets and airlines which issue reward points and air miles are issuing Units.
It's not Rocket Science. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Money is redeemable for anything, from anyone. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
I would propose as a starting point membership by energy users and consumers alike of an International Energy Trade Association (defined by use of a transaction registry) and then to build an Energy Pool, Guarantee Society upon that foundation, and apply unitisation within the resulting framework.
I think that you would be hard pressed to find people not prepared to accept a Unit redeemable in energy if such a framework of trust existed.
Note that I see Units redeemable in energy as a global reserve currency. Units redeemable in land rental value would probably comprise most of the value circulating locally. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
And a market structure that works for storable goods can work for un-storable services, though it does not have to.
I think I will have to make a diary of how I understand Chris so far. My present position is that there is something very appealing with decentralising credit creation, though I do not really see how Chris system would work on a larger scale. Then again the steam engines were quite a mystery scientifically until thermodynamics, and the theories surrounding them where inconsistent and had severe problems. But that did not stop the engines from working. A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
As long as the owner is not the State, or guaranteed by the State, that risk is in there. If that risk is assessed by market instruments, you end up with a higher discount rate.
There's no market trick around it. A production facility presents risks, if not absorbed in a wider entity. They have a price. In the long run, we're all dead. John Maynard Keynes
But I am proposing an alternative method of risk sharing without involving the single points of failure represented by risk intermediaries.
As for States, you only need to look at what happened in the tin market.
Put Not Your Trust In Princes..... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Copenhagen is currently an argument between cripples fighting over a crutch ie between developed and developing energy user nations.
Little is being said about the catastrophic wastefulness of energy producer nations. That is the low-hanging fruit, and as I said here, I think it is through the unitisation/monetisation of energy that we may achieve an optimal outcome.
Natural gas is homogeneous in the way that other fuels are not; does not have the same established marketplace, and vested interests; and would take relatively few nations (Russia, Qatar, Iran, China, maybe Japan) to kick-start a global market.
Units redeemable in gas have a use as long as the underlying gas exists. But don't forget (say) biomethane, and don't forget the potential use of synthetic gas as an energy vector, as is proposed for ammonia by strandedwind. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
I'm sure you can find examples of disaster caused by organic farming (a humanure spill upriver of a drinkable water uptake? :-) En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
Transparency of the Units in issue, as is a "framework of trust" and the need for due diligence in ensuring suppliers' capability to supply.
The proposal creates virtual financial markets in gas Units which are linked to, but which do not affect, the underlying physical market. The physical market price formation for gas, and the price at which producers sell Units into a "Gas Pool" are an interesting subject.
Infrastructure such as terminals, pipelines and shipping could gradually be assimilated into a global monopoly in common ownership, and operated by a networked consortium of service providers receiving an agreed proportion of gas sale revenues.
I don't know exactly how the market would develop globally in practice, but I am quite sure that the commercial logic for consumers and producers alike is compelling. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
