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2007: record year for US wind industry

by Jerome a Paris Fri Jan 18th, 2008 at 05:20:17 PM EST

Disclaimer: I am working for the wind industry - I finance wind projects in Europe.

This is impressive news:


Shattering all its previous records, the U.S. wind energy industry installed 5,244 megawatts (MW) in 2007, expanding the nation's total wind power generating capacity by 45% in a single calendar year and injecting an investment of over $9 billion into the economy, the American Wind Energy Association (AWEA) announced [yesterday].


This was widely expected to be an excellent year, after an already good year in 2006, when more than 2,500MW were installed in the US. hopes were that 3,000, or even 3,500MW would be installed in 2007. With more than 5,000 MW built and connected to the grid, the record for any country is shattered (the previous one was Germany with 3244 MW in 2002). And 2008 is looking good too.

As the AWEA notes, wind power has several advantages:


  • Helps protect consumers from increases in electricity costs due to volatile fuel prices and supply disruptions:  by reducing the use of natural gas and other fuels used for electricity generation, and lowering the pressure on their price, wind can save consumers money, even in regions with low or no wind resources.

Wind power prices are quite simple: there is no fuel cost, just a little bit of maintenance, so each additional kWh of power provided when wind blows is almost free once the turbines are installed. Which means that the only cost is the amortization (or financing) of the initial construction. And the good news is that this cost is set in stone from the start, and will not change for the next 20 years: you know how much interest and principal you need to pay, and that's it. Compared to gas-fired plants or even coal-fired plants, whose main cost is that of the fuel, it's becoming a huge advantage, and an incredibly safe bet.

Even better, as the AWEA notes, each time wind blows, power with zero marginal cost is sent into the network; with electricity market prices set at the highest marginal cost needed to satisfy demand at any given moment, the more ultra cheap power you have, the lower that market price will be, as there is less need to tap the more expensive producers (like diesel plants or gas peaking plants). That reduces the price of electricity for everybody. The Economist noted that studies in Denmark have shown that the savings to electricity consumers thanks to that effect are now larger in that country than the cost of subsidizing wind power production - which means that this is exactly the kind of things that governments should do, ie bear an expense that creates a larger gain for the overall population.

Today, wind power, while still more expensive than existing coal and nuclear plants, is cheaper than gas-fired power and, thus, most of the time, cheaper than market prices which are driven by gas prices. The trouble is that investors are not yet convinced that this will be true for the full next 15 years, and are still reluctant to some extent to support wind construction without some form of support. In the US, that support takes the form of the PTC, or production tax credit, which allows investors to deduct, for ten years, an amount equal to 2cents/kWh from their tax bills, which can thus be added to their income coming from the wind project.

The PTC is pretty low compared to European support mechanisms, but given that the US has a generally better wind resource, it's been more than enough to support the industry. The problem is that it is a temporary mechanism which is only extended for a year of two by Congress each time it lapses, causing huge uncertainty. In fact, several times in the past few years, it was not renewed in time and killed the industry for that year, creating havoc for the industry worldwide (some manufacturers almost went bankrupt).

Oddly enough, the problem with PTC is not that it's unpopular in Congress, but the opposite: that it's hugely popular. That means that any law that includes it is likely to be supported by a strong majority, and then gets larded with more disputable - and disputed - items, which are then opposed. The PTC gets taken hostage, effectively... Crazy, but true.


  • Reduces global warming emissions: To generate the same amount of electricity using the average U.S. power plant fuel mix would cause over 28 million tons of carbon dioxide (CO2) to be emitted annually.

This is pretty obvious too. Each kWh of wind is carbon-free, and reduces the need for the same kWh to be generated by a hydrocarbon-burning plant. Some contest that effect by saying that wind power is intermittent, and thus unreliable, and requires fuel-burning plants as back-up for times when there is demand for power but no wind. What is true is that wind power cannot eliminate the need for coal-fired and gas-fired plants, but it does eliminate the need for these plants to actually burn fuel: having these plants around, but functioning at a lower capacity is a net plus for carbon emissions. A lot of gas-fired plants are designed not to be used for permanent use (gas peaking plants can be profitable even though they function less than 5% of the time), so this is technically feasible and imposes minor costs - and it DOES reduce emissions (for a discussion of a more detailed study, see this diary: No technical limitation to wind power penetration).

The problem today is certainly not that of too much wind in the system, it is that, despite recent growth, wind investment is still dwarfed by investment in the traditional power sector, as this table from the US Energy Information Agency shows:

Just under double the capacity in gas-fired plants was built than in wind. And, with wind power's lower capacity factor (30% for wind, which means that a wind power will produce, on average over the year, only 30% of its maximum potential capacity, as opposed to 70-90% for gas) that means that capacity additions in 2007 still translate in 5 times more kWh coming from gas than from wind just for the new capacity.

The problem is that gas is no longer plentiful: production in North America (ie US and Canada) is declining, which means increasing LNG imports - a sector where there is heavy competition from other markets:

Even if there is enough gas, the massive requirement to invest in the LNG infrastructure, and likely bidding wars with European buyers, are going to keep gas prices high - and thus power prices.


  • Conserves precious water resources: Wind farms don't need water for steam or for cooling, a benefit that is increasingly valuable in arid areas and in times of drought.

This is a less obvious argument, but a vital one in many areas, as steam-based power plants (which also includes nuclear ones, in that instance) require access to plenty of water to function.

So, some may ask, why subsidize wind power if it's so great and so damn economic already? As I noted above, its competitivity in the short term has not yet convinced investors that this will be the case over the next 15 years, the usual duration to finance the investments. The good part of having fixed production costs is that they cannot go up; but the downside, of course, is that they cannot go down which means that, should there be any period of lower gas prices, wind power plants would not be able to repay their debt during that period - and banks absolutely hate payment defaults, even temporary.  The risk is low, but enough to give cold feet to lenders without some additional revenue source, and the lack of financing makes projects much less attractive for investors.

Also, wind is almost competitive despite the massive subsidies received by its competitors (all the tax breaks received by the oil&gas industry, no accounting for pollution and carbon emissions, etc...), and the PTC only levels the playing field to some extent.

But there are other reasons why more support for the industry would be worthwhile, even given prevailing price conditions:

  • wind power creates a lot more jobs per kWh produced than all other technologies. Good manufacturing jobs, good construction jobs, and long term maintenance jobs. Even better, apart from the manufacturing ones, these jobs are not offshoreable, and are usually located in the communities near thewind farms, often providing a much needed boost to areas with otherwise few prospects;
  • wind power does not require the control of the Persian Gulf by US Navy aircraft carriers nor grunts in Iraq;
  • wind power is local, is plentiful, and will not be depleted;

Some will say that wind farms are ugly. I don't have an argument against that, but would suggest that there is enough space for wind power projects without needing to put them in the most spectacular spots.

And as a final note about my partiality here: as a financier for the industry, I have to make sure that we do not take inappropriate risks. In particular, that means making sure that performance claims are not inflated, that costs are as announced and, a very important thing, that each project is well accepted by the local community and that there is no hostility (as this can lead to judicial procedures, delays, and bad publicity, all things which cost money and can compromise debt repayment). So bankers - when they do their job - have to remain clear-eyed about the industries they work with...

Display:
by Jerome a Paris (etg@eurotrib.com) on Fri Jan 18th, 2008 at 05:27:08 PM EST
http://www.dailykos.com/story/2008/1/18/153548/882/323/439015

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Jan 18th, 2008 at 05:27:38 PM EST
[ Parent ]
It's too late to recommend it, sadly.

I'm bookmarking your post.  Great reference material, because if anyone is worth referencing on wind power, it's you :-)

by Plutonium Page (page dot vlinders at gmail dot com) on Sun Jan 20th, 2008 at 07:30:23 AM EST
[ Parent ]
The US has far greater wind resources and much lesser population density (i.e. people don't like wind farms in their neighbourhood) and thus will probably far outstrip Europe in wind capacity development even in a less favourable regulatory environment.  Once the economics are demonstrated, they will go for it in a big way.  (The fact that the maintenance jobs can't be off shored is not necessarily a plus from an investors point of view as it means labour costs can't be reduced to Chinese levels)

Essentially what is killing the rapid development of the industry is the lack of certainty in future energy prices - 15 years is an awful long timespan for many investors not yet convinced about peak oil - and all the investment has to be upfront.  If average electricity prices could be guaranteed at break-even levels investment would be huge because of the upside potential and as a hedge against energy price inflation in general.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jan 18th, 2008 at 06:08:36 PM EST
If you don't use debt, but instead create redeemable energy units and sell them to investors (similar to an Exchange Traded Fund), then you don't have to worry about defaults, and you needn't risk any of your capital.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Fri Jan 18th, 2008 at 07:41:03 PM EST
Here are the parameters:

  • your 1MW turbine costs €1.5M, which needs to be oaid upfront to the turbine manufacturer
  • once installed, it will produce between 2000 and 3000 MWh per year, depending on the wind (from the pure randomness of wind)
  • if you sell at market prices, you can get 50€/MWh, but you might get as low as 25 or as high as ... well, a lot more - let's say €75 for now.
  • you have €20,000 euros in operating costs per year, to keep things simple.

So, you generate between 50 and 225 thousand euros pet year of gross income, with an expectation of around 125 thousand. Before repaying investments, you thus have around €100,000 to distribute, but this may be as low as €30,000 or as high as €200,000 or more.

So please tell me how these net revenues are allocated between the investors who provided the initial €1.5M. Give me the formulas and convince me that this is a good investment for me or anyone else.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 05:33:13 AM EST
[ Parent ]
What is the life of the project and what assumptions do you make on inflation and interest rates?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 05:59:00 AM EST
[ Parent ]
life of turbines: 20-25 year
operating costa: typically doubled for year 10-20
inflation: you tell me (it is only money)

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 06:08:43 AM EST
[ Parent ]
Interest rates?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 06:19:49 AM EST
[ Parent ]
I know the kind of interest rate I want to charge to provide debt as an oldfashioned (toxic) banker; I have no idea what the concept is replaced by in Chris's version.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 09:40:51 AM EST
[ Parent ]
Well it's actually about the "market return" on Capital isn't it, if one considers Capital to be property in productive assets?

Money, unless it is Money as Debt, actually has no "cost".

The cost of Credit is the shared cost of administration, and the shared costs of defaults.

This has nothing whatever to do with arbitrary rates of interest.

Likewise the cost of Capital has nothing to do with interest rates unless you are in an economy where Money is debt.

The cost of Capital relates to the "market price" and that has declined from 25% pa in Babylonian times, through 10% pa in medieval times to around 5% pa at the Indutsrial Revolution. Now the world is awash in productive capital, and the streams of use value they generate, I reckon the market price can be little over 1%.

All of these in real terms, of course, since without deficit-based money there was little inflation historically, and there would have been little inflation in the last 100 years, I suspect.

The sort of rate Wessex Water got on their 50 year index-linked borrowing ie 1.49% pa is indicative, I suspect.

What you are able to "charge" for credit you create is pretty much constrained, I think.

There's a lot of stupidly high expectations out there for sure.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 02:13:37 PM EST
[ Parent ]
ChrisCook:
There's a lot of stupidly high expectations out there for sure.
The whole "wealth management" industry exists to cater to people with more money than they know what to do with, and stupidly high expectations.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Jan 26th, 2008 at 11:54:34 AM EST
[ Parent ]
You need €1.5M, because the manufacturer is not participating in any way (which we will come back to).

At €50 per Mwh that's 30,000 redeemable units you sell.

At €30 per MwH that's 50,000 redeemable units.

The price you can sell them at depends upon the existing market price, and people's perceptions of where it's going.

These units are redeemed (or not, many will not be, in the same way that a large proportion of gift vouchers never get used) against energy used over the life of the turbine.

Investors can sell these units at the market price at any time.

It's like buying gold (or rather, units in gold ETF's). No income, but a punt on the gold price.

Who thinks energy is going to get cheaper in the long term? And if it does, we gain as consumers from that fact anyway. It's a hedge against energy price inflation.

Investors can exchange these units against electricity consumed. If they are local investors, connected via a "private wire" (eg Woking) then they are  getting energy at cost without the grid mark-up.

There will always be a market price since electricity is being consumed all the time.

It's a question of managing the liquidity pool and ensuring that the project is viable in the first place (your job as an investment banker, as opposed to a credit creator).

Moreover, you could look at the relationship with the supplier of kit as well (ie to a leasing model), since an investment in such a supplier could then be reconfigured into an investment into the electricity their kit produces.

Also infrastructure: an energy pool could also invest in the infrastructure (but using a partnership model, not a limited company) that brings the electricity to market, and that way you can extend the "private wire".

Of course, you don't just do this with one turbine: you create a pool which invests in thousands of them. And the only risk, which is pretty much known these days, is the development risk.

A major participant will be government, at local and national level, who are major energy consumers and whose investment in such Pools would essentially "hedge" their future energy requirements and fund necessary infrastructure.

Such an energy pool can also be used to invest in energy savings (NegaWatts) but that's another story.

The first key point is the idea of "equity" redeemable in "money's worth", rather than money.

The second is that this is how you create a non-toxic form of fungible "asset-based" energy currency.

The third is that Banks need not be credit intermediaries putting their capital at risk, but service providers sharing in the value created.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 06:12:44 AM EST
[ Parent ]
Please tell me why would anyone buy your redeemable units, and at what price. Who decides to sell them at 30 or at 50? Who buys them, and why?

If your idea is to have a government-run pool, isn't is a lot easier to have a government-run electricity operator that builds windfarms and distributes power to consumers at society-favorable prices?


And the only risk, which is pretty much known these days, is the development risk.

No, there's the operational risk, ther's the price risk, there's theregulatory change risk, there's the fraud risk, etc... How do you deal with these? ie who takes a loss if they happen, and how can they mitigate it?

Please give me an exemple for my turbine, telling me who buys what at what price and gets what in return. In particular, given that the actual number of kWh produced in a year in unknown, and that the value of the kWh each year is unknown, how are either kWh or revenues shared, according to the volume available.

Be concrete, please.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 06:54:32 AM EST
[ Parent ]
Please tell me why would anyone buy your redeemable units, and at what price. Who decides to sell them at 30 or at 50? Who buys them, and why?

Leaving to one side the sort of Investors who buy gold as an investment, these units could be sold to anyone who has an interest in hedging electricity consumption.

What I am describing is an undated, un-geared futures contract. If you want gearing, then borrow to buy units, or buy call options on them (a market would develop soon enough).

Moreover this will be a market suitable for retail customers, because it is un-geared.

If your idea is to have a government-run pool, isn't is a lot easier to have a government-run electricity operator that builds windfarms and distributes power to consumers at society-favorable prices?

Government run? You must be joking. We don't all have efficient and non-bureaucratic governments like the French, you know. ;-)

Community owned, yes. By which I do not mean "the State" in the form of local or national government.

I mean assets placed in trust, with government participating as a market user/consumer, and as an investor.

The Managing/Operating partner within a "Community Energy Partnership" framework could, probably would, be a "private" sector operator, or maybe a community cooperative if they have the skills.

Essentially I propose a partnership between service users and service providers.

No, there's the operational risk, there's the price risk, there's the regulatory change risk, there's the fraud risk, etc... How do you deal with these? ie who takes a loss if they happen, and how can they mitigate it?

Operational risk you would probably build in to a leasing model, as I said. And if the turbine manufacturer isn't up for it, because he's a Plc or debt funded, or both, then you buy him out, or start your own, again as a Community (or Federation of Communities) owned business.

Regulation (and taxation) are always a risk but it works two ways: the units an investor buys could become more or less valuable.

Fraud? The use of a Custodian for funds will limit that, but shit happens.

It's your job as an investment banker to do the due diligence on projects to see that they appear viable and that no more units are to be sold than the project is capable of producing. A prospectus will be needed in the normal way, and there will be a minimum unit sale price below which a project will not happen.

Price Risk? Of course. That's what this is all about.

Investors are taking a risk as to price. If the market price doubles they make 100%. If it halves, they lose 50%.

Hedgers are off loading price risk. So if the local school buys 100 MwH and the physical market (externally provided) price goes down, they don't lose anything: it's just that they don't gain from the fall in physical market price.

Please give me an exemple for my turbine, telling me who buys what at what price and gets what in return. In particular, given that the actual number of kWh produced in a year in unknown, and that the value of the kWh each year is unknown, how are either kWh or revenues shared, according to the volume available.

Be concrete, please.

Let's assume we've sold 30,000 units at 50 euro's to hedgers and investors, local or otherwise.

Each year there will be operating costs to meet and sufficient production must be sold to meet these costs, or future production (if there is any unsold).

The liquidity pool must be managed, essentially a Treasury function.

The balance - if there is any - is firstly sold locally to anyone presenting units for redemption, and whatever is not consumed locally in this way is sold to the Grid under conventional arrangements, as now. In fact, it would be possible to provide that local sales could only be made in energy units.

Locals would be quite happy to pay anything up to the Grid price for these units. Until we buy out the Grid by "partnerising" it.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 08:04:37 AM EST
[ Parent ]

What I am describing is an undated, un-geared futures contract. If you want gearing, then borrow to buy units, or buy call options on them (a market would develop soon enough).

No, a market will not develop, because the product is not standardized. That's why each project has a taylor-made financing today: because you must adjust to the specific conditions in each case (different technical constraints, different local partners, different wind potential, investors with different goal in each case - PR, return on investment, fulfilling regulatory obligations, power prices, etc...)


Operational risk you would probably build in to a leasing model, as I said.

Leasing is just a financial object, not a risk allocation technique. What I mea, is - who loses out if production is less than expected? What's your cash waterfall which describes exactly who gets what money in what order when revenue is generated?


And if the turbine manufacturer isn't up for it, because he's a Plc or debt funded, or both, then you buy him out, or start your own, again as a Community (or Federation of Communities) owned business.

Suddenly you jump from building a few MWs of wind power to becoming a manufacturer of wind turbines, a completely different business, in the heavy industry sector, where the investment requirements are of a total different scale. This is, quite simply, ridiculous. Are you also going to tell me that if Toyota does not want to take your units to pay for the pick up truck to go operate the turbine, you'll also go into "community-owned" pickup truck manufacturing?


It's your job as an investment banker to do the due diligence on projects to see that they appear viable and that no more units are to be sold than the project is capable of producing. A prospectus will be needed in the normal way, and there will be a minimum unit sale price below which a project will not happen.

I thought the whole point was to get rid of the evil investment bankers? If we're in the picture, why not stick with our existing solutions, which do not require anybody to step out of their normal professional position, allow risk allocation on a case-by-case basis in accordance with each entity's needs and priorities, and, you know, actually happen and work?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 08:27:00 AM EST
[ Parent ]
No, a market will not develop, because the product is not standardized

What is not standardised about a unit of energy?

I am proposing a Pool denominated in units of energy, and investors will pay conventional money to buy these units, exactly as they would buy shares in Exchange Traded Funds. While hedgers will buy them in order to lock in price.

The resulting funds will then be invested - without using the conflicted "Debt/Equity" paradigm - to create production of units of energy.

I am proposing "ownership" of productive assets in trust on behalf of the communities, with production shared equitably as between those responsible for bringing it about.

Sure, each project is different, and needs to be appraised in terms of expected costs, and expected production. Your job.

But it is IMHO possible to achieve the same goals using a structure an order of magnitude simpler than now: this doesn't appeal to people who have no stake in the outcome, or to intermediaries.

Leasing is just a financial object, not a risk allocation technique.

Sure: leasing the way you are accustomed to doing it does not share risk. I believe that it is possible to confugure things differently, through partnership arrangements.

This is, quite simply, ridiculous.

Sure it's a leap from a single turbine to a thousand, and to a Pool of Pools capable of funding the necessary infrastructure.

You have a multi-faceted vision of how a deficit-based model may "Energise America".  I do not call that "ridiculous" even though you base it on a manifestly unsustainable financial paradigm which is even now - as you yourself document - breaking down around us.

A deficit-based economy cannot - the mathematics of compound interest prevent it - work in the long term in a world of finite resources, and is the principal direct cause of our problems.

That is a fact.

We need another way of doing it, and not only am I putting forward a view as to how that might work, I am doing my level best to make it happen, and getting a lot of traction, albeit at the "micro" level we are initially aiming at in Scotland and Norway.

I thought the whole point was to get rid of the evil investment bankers?

Now that snark really is not worthy of you. My view, expressed clearly and often, is that bankers have a perfectly valid role to play, but credit creation is not it.

Just in case you tuned out, bankers may IMHO add value:

(a) in managing mutually guaranteed bilateral credit creation;

(b) in appraising projects to build productive assets and to bring investors together with investment using "asset-based" finance through "unitising", as opposed to "securitising" production.

If we're in the picture, why not stick with our existing solutions, which do not require anybody to step out of their normal professional position, allow risk allocation on a case-by-case basis in accordance with each entity's needs and priorities, and, you know, actually happen and work?

But the point is that the toxic combination of Debt and shareholder value "Equity" combine to ensure that they do not "work" other than to concentrate ownership of resources in fewer and fewer hands.

And State solutions, IMHO, are little better.

Credit creation by Banks, coupled with private property in "Commons", and "free" limitation of liability - is why we are in this mess, and credit creation by Banks will not get us out of it.

If all we ever did is persist with "existing solutions" we wouldn't get very far.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 10:02:51 AM EST
[ Parent ]

What is not standardised about a unit of energy?

Because what you're offering to trade is not units of energy, but units of energy production capacity. It's like saying that you can go buy bread with units in wheat fields: not gonna happen.


I am proposing "ownership" of productive assets in trust on behalf of the communities, with production shared equitably as between those responsible for bringing it about.

You keep on saying "equitably" but you never once say what is equitable.

The existing model is equitable: the manufacturer gets paid for machinery and agreed warranties. The operator gets paid the first slice of revenue for making the equipment function correctly and generate revenue. Banks get paid next for providing the initial funding, and require an amount which is likely to be available even with low prices and lower than average wind, providing low but stable revenue to them and their capital. Investors get the rest, which is very volatile but is expected, on average, to produce a higher return on their initial investment - with the risk however that they will be wiped out if something goes wrong.

Tell me who takes what risks in your model. Who, what, how? Not grand words like equitable. concrete numbers for my turbine, please.


 leasing the way you are accustomed to doing it does not share risk. I believe that it is possible to confugure things differently, through partnership arrangements.

Please define leasing, then before telling me how I'm accustomed to doing it. Leasing, for me, simply means that you don't own the asset, and you pay some form of rental to use it. Rental obligations can vary widely, from the way payment amounts may vary, how long the lease lasts and how it may, or may not, be interrupted, and who ends up with the asset in the end. So I'm not sure what I'd be accustomed to do. Please provide your definition. You cmplain about my use of "ridiculous" but you sprinkle your comments with casual insults that are all the more annoying that you don't even bother to define what you claim I know nothing about.


you base it on a manifestly unsustainable financial paradigm which is even now - as you yourself document - breaking down around us.

It's not the financial paradigm which is breaking down, it's banking without risk analysis which is, as it always has been, unhealthy. It's not quite the same thing, as it is very much possible to have banking systems that do not drive all economic activity, because they are regulated differently.


But the point is that the toxic combination of Debt and shareholder value "Equity" combine to ensure that they do not "work" other than to concentrate ownership of resources in fewer and fewer hands.

Meh. It's bank lending that has allowed nobody hippies, local farmers or cooperatives to build their windfarms using "toxic" credit instruments. Color me skeptical of your grand claims.

You mistake tools for how they are used. The utopian tools you have in mind will get misused just as easily as current banking tools are.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 10:30:52 AM EST
[ Parent ]
Because what you're offering to trade is not units of energy, but units of energy production capacity. It's like saying that you can go buy bread with units in wheat fields: not gonna happen.

It's been around - imperfectly - for years in the form of futures contracts.

In 1989 there was an interesting experiment - DeliDollars - where a Deli owner raised $5,000 by selling units of future production forward to his customers.

I'm proposing a straightforward, albeit un-geared, and un-dated, alternative to futures contracts, and the reason it has not been done to date is simply that the legal forms did not exist to allow it.

Selling production forward in this way will happen IMHO, and it will be big. And it will require exactly similar risk management to that which you already practise.

You keep on saying "equitably" but you never once say what is equitable.

The existing model is equitable: <snip>

Equitable means "fair": but fairness is in the eye of the beholder.

IMHO conventional Equity is not "equitable" in terms of sharing risk and reward, and neither is a Debt contract. If you combine the two by using debt secured over assets owned by a company then you get two conflicting claims over the same asset

Sure it's possible to tie these financial claims together using "binding" contracts, the same way that you can tie together two N/S magnets. But they will always tend to fly apart.

I advocate proportional sharing of risk and reward as between financier and user of finance.

I do so firstly because I believe that it is "fair", and secondly because I believe it actually "works" which is why people are increasingly doing it.

Leasing, for me, simply means that you don't own the asset, and you pay some form of rental to use it.

"Use" is fine. I advocate a form of "co-ownership" - I've heard it called an "evergreen lease" - where the rights of use are set out in an LLP or LLC agreement.

but you sprinkle your comments with casual insults that are all the more annoying that you don't even bother to define what you claim I know nothing about.

If you consider any of my comments as insults then that is regrettable: and nowhere on this site will you find anything written by me that questions your knowledge of your subject.

I only request the same consideration from you, because if there is one thing I do understand it is how market mechanisms, and the legal protocols of which they and the contracts traded on them, actually consist and work.

it is very much possible to have banking systems that do not drive all economic activity, because they are regulated differently

I give you that it is possible to have non-toxic forms of banking. But only in the absence of the exponential growth of money supply which is a direct consequence of Money as Debt.

There is no way around this inconvenient truth, I'm afraid, however well Banks analyse risk, and no matter how well Banks are regulated.

Fortunately, the disintermediating effect of the Internet is about to render our disagreement on this subject irrelevant.

Meh. It's bank lending that has allowed nobody hippies, local farmers or cooperatives to build their windfarms using "toxic" credit instruments. Color me skeptical of your grand claims.

You mistake tools for how they are used. The utopian tools you have in mind will get misused just as easily as current banking tools are.

Hmmm...do I detect a "casual insult" here? Surely not.

The "utopian" tools I observe emerging - the entire Canadian capital market comes to mind - are doing so simply because they work. Pension funds actually like getting their hands on Company revenues before the management does. The fact that this "pre-distributive" arrangement shares risk and reward more "equitably" IMHO is an added bonus.

Banks as credit intermediaries are no longer necessary: it's that simple.

Anyway, I've enjoyed the cut and thrust: I can't speak for you. If we agreed all the time we wouldn't get anywhere, and there is a lot (indeed most) of what you say that I agree with wholeheartedly.

ET'ers will make up their own minds as to the rights and wrongs of the discussion.

Keep on energising, and may the best paradigm win!

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 11:55:02 AM EST
[ Parent ]

IMHO conventional Equity is not "equitable" in terms of sharing risk and reward, and neither is a Debt contract. If you combine the two by using debt secured over assets owned by a company then you get two conflicting claims over the same asset

There's no conflict. Lenders are "senior secured", ie they get first dips on the security when it is invoked - until they get paid. In normal times, they are entitled to specific payments; if these payments cannot happen, then they can make a claim on security. This is all laid out in the financial documentation. The legal form is fundamentally irrelevant, what matters is the precise definition of the rights and obligations of each party.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 12:16:57 PM EST
[ Parent ]
The legal form is fundamentally irrelevant, what matters is the precise definition of the rights and obligations of each party

The use of an LLP or LLC as a legal form allows those financiers "outside the box" - should they wish, and to the extent they desire to - to come within the LLP/LLC legal protocol/framework which defines "the rights and obligations of each party" and thereby to share risks and rewards as they may consensually agree.

If all you are doing is borrowing then the legal form of the borrower is irrelevant, I agree. But I am observing new alternatives to borrowing - Income Trusts being one, and "Capital Partnerships" being another .

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 12:42:01 PM EST
[ Parent ]
what makes you think that we bankers don't already use LLC or LLPs when it's convenient?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 12:46:11 PM EST
[ Parent ]
I'd be amazed if you didn't.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 12:58:52 PM EST
[ Parent ]
I think the key here is the part about bringing bankers and manufacturers into a more symbiotic relationship.

Am I right in thinking that the debt problem is basically too many people needing to make a profit as costs rise--inflation?  Or that those with the most money demand over-the-possibilities payments for loaning out their money?

Jerome makes me think he'd say: "If banking is done correctly there cannot be an over-the-possibilities arrangement."

But...I think the key is right as Jerome says: Why should bankers try and be builders too?  Each to their own area of expertise.

To which I imagine a reply: "It depends if the builders are more interested in building or making a profit."

If the latter, then back to the issue about over-the-possibilities...okay, I'm not expressing myself well.

Sviatoslav Richter - Moments

(Invigorating!)

I'm thinking, okay, a company can't declare the future, there are unkowns, risks of all kinds, so we need a cushion--say 4-6%.  How big the cushion should be--I suggest those numbers from what I've read.

So a manufacturer quotes at 4-6% above costs (where costs include paying staff well, including all the way back to raw materials, so costs may be higher than average)--(but the profit is at 4-6% max as it's laid in stone more or less--it's the price of the risk--where risk has to avoid "rip off"--maybe impossible in some cases, but with wind farms there is already plenty of legislation for all parts of the process.)

So--I build wind turbines, or know people who do (I'm thinking of Crazy Horse); they are the people who like building wind turbines and 4-6% (or tell me a number--I'm interested!) is fine--it oils the wheels without covering everything in sticky gloop.

So as long as a financier can raise enough cash--lock in!  Guarantee business against production.  Note that buying longer brings stability (order ten years production of steel up front--I think this is part of Chris's idea--that everyone can buy in, lock in to an equitable (no one is taking more than 4-6% and that's understood to be fair liquidity)--and if costs drop, then 4-6% on top is still 4-6%.

A money hound--a person after profit--will shop elsewhere while there are businesses generating higher profits.

Okay.  Start with products that rely less on money hounds.  Energy!  Communities need it (I think the CO2 kicker--hey, I get my electricity from the wind, mate! will allow wind prices to stay above other forms--stability!)

(cough cough!  I mean, if I saw wind turbines on the hills surrounding our town, and I knew I was a partner in those wind turbines, and I knew everyone down the line was playing 4 to 6 and not "rip your pockets", then as long as it was affordable....)

So: if financiers and manufacturers (builders) could come together at four to six, would prices be higher or lower, assuming all other variables are the same whether they do or don't?  (Maybe a big if!)

Because if that works, I'll buy in.  I understand the energy credit as being ownership of production much as Jerome said with bread.  If I have rights to my potential X percent of grain, I have my access to my bread.  I can give those rights (in the form of money of some kind) to the baker, but the total of credits in the system add up to the production.  We all lose if no grain grows, so we're all that bit more involved in making sure grain grows = I (we!) can continue to eat bread.  

Moving out of the comfortable countries, there are going to be food riots across the globe soon (I'm happy if I'm wrong)--prices are rising and populations are high--a crash that would be completely avoided if (I suggest!) the farmers and communities were linked in as Chris (I'm suggesting!) suggests.  And the energy suppliers (food production needs energy--melo's electric tractors!), and the suppliers of chemicals (of the non-toxic to life kind)--that could be those who collect guano--it could be a link in with the refuse collectors--organic waste becomes fertiliser in realtime.

But why would a banker want to worry about all that?

Why would anybody?

Because separate-but-equal doesn't work?

I was thinking of Rupert Murdoch's brain today, wondering if he thinks just like the average thickhead.  How else would he know how to push all their buttons, and why else would he want to?  The average thickhead wants control, sex, money, more sex, wine, wo/men, just everything that Murdoch sells, with CONTROL number one and FEAR just above it (but given, not asked for--); and I think: "Why aren't there any newspapers I can read without tut-tutting my way quickly from front to back?"

Somehow that's connected.

I'm wondering "How far are we going to go with this intelligence we all have?  Where there are walls there is fear.  Where there aren't walls there are things to be afraid of, maybe.  But how do we know if we never go outside the walls and how do we get safe if we have no protection?  By getting symbiotic--by living as far as we can within a culture of win-win relationships--

Importantly: with nature.  Chris mentioned finite resources.  How does any banking that suggests we can live above 4-6% percent--how does that work?  Because the profits end up as consumption somehow (more use of finite resources) or else there's no need for them (above 4-6%)

Heh!  

Yours,

Ikernov Nussink.

Shostakovich plays Piano Concerto No 2 III. Allegro (1958)



Don't fight forces, use them R. Buckminster Fuller.

by rg (leopold dot lepster at google mail dot com) on Sat Jan 19th, 2008 at 05:42:01 PM EST
[ Parent ]
I'm having a hard time understanding this argument and why the key players - entrepreneurs, investors, bankers politicians (aka Government) and consumers should go for it. Let us presume for a moment that their primary motivations are - consumers (price), entrepreneurs and investors (risk reward ratios), bankers (interest or service fees to risk ratios) and politicians - (will I get elected next time if people don't like wind farms and I can always blame power outages on the Russians anyway).

The problems seems to be

1)  Short term vs. long term - consumers are worried about their electricity bill this year, entrepreneurs/investors/bankers have to SHOW a profit this year, and a politician's max immediate life span is five years (with an attention span of 5 minutes).

ii) the unquantifiable nature of the risk - Oil prices HAVE gone down dramatically for long periods between spikes in the past

iii) All the investment has to be very upfront - major cash flow issues for anyone who doesn't have deep pockets, or huge credit facilities - you are not talking about humanitarians or visionaries here

iv) The market makers in the "redeemable units" will cream off huge service fees which will make the whole thing unattractive for a small investor

The longer term nature of the business may make it attractive for pension funds who have huge assets and very long term liabilities but who will see wind energy as just one other class of asset in their portfolio and one they can usefully use as a hedge against oil price sensitive stocks (e.g. Airlines.

But is this not good ol capitalism as we know it?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Jan 19th, 2008 at 07:04:35 AM EST
[ Parent ]
(i) Short term vs long term

The point is that "term" doesn't come into it in an equity-based structure like this. "Time" is not a consideration as it is in a deficit-based system.

(ii) the unquantifiable nature of the risk

Nothing new here. Price risk over time is price risk over time. The difference is that I'm proposing a simple new way in which risk may be bought and sold - without the "gearing" of a futures contract.

Price Risk is and always will be in the eye of the beholder.

(iii) All the investment has to be very upfront

Indeed, which is why the government should prime the proposed "Pool" from a carbon tax ($20 a barrel?).

The redeemable energy units they will receive in return for the investments enabled by the Pool will be distributable as they see fit, ideally as an "energy dividend".

Government should also create credits (as the Bank of England is doing with Northern Wreck) to invest in units. To those who say that this is inflationary, I would say that it is less inflationary than having banks create the credit, but with an interest burden attached...

(iv) The market makers in the "redeemable units" will cream off huge service fees which will make the whole thing unattractive for a small investor

What a pessimist you are! Units in a "Pool" like this will undoubtedly be acceptable in exchange by virtually anyone, for anything. Because they know it will be acceptable against something of value to them.

But note that these units of energy "ownership" are not like futures contracts with lots of "prompt dates", fragmenting liquidity, with money creamed off from fund investors as positions are "rolled" from month to month.

The more liquid the pool, the less market-makers will cream off.

This market, as pools link with pools to form a networked "Energy Clearing Union", will comprise a simple asset class of "ownership" of x Kilowatt Hours. Essentially an energy-based currency - an "energy dollar" maybe.

Lots of issues, of course, but nothing the assembled brains of ET couldn't handle.

This
Kilowatt Cards
guy has essentially already done it, using his own money, just to show what's possible.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 08:46:28 AM EST
[ Parent ]

The point is that "term" doesn't come into it in an equity-based structure like this. "Time" is not a consideration as it is in a deficit-based system.

This is like saying that time is not relevant when swimming underwater, so long as, on average, you spend enough time above water.

It's like all these financial models that work as long as there is liquidity.

Term matters when you have limited resources.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 09:44:05 AM EST
[ Parent ]
Firstly, time constraints are entirely artificial constructs, and your swimming analogy is not apt.

I propose replacing (and I've done it and seen it done, it's not difficult):

(a) use for a defined term (eg debt, leasehold) with use for an indefinite or indeterminate period (ie no "term")- ie for as long as you use an asset in which investment has been made, you share the revenues you create; and

(b) "absolute" ownership with trusteeship.

Secondly, renewable energy is not in any meaningful sense a limited resource.

Finally, what could be more liquid than an "energy dollar" of a set amount of energy?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 10:38:03 AM EST
[ Parent ]
If you have a limited number of energy units, as per your theory, then it follows that only one person can use a given unit at a given time. If your project is not generating electricity at any given time, for real world reasons (no wind, maintenance downtime, etc...) then those that were expecting to have energy units to spend on, say, heat themselves up, won't get them, and the producer implicitly keeps them on a temporary basis. If your pool allows the recipient to nevertheless receive - and use - those energy units, it's effectively allowing two people to use the same energy unit, and it's creating units, which is evil, evil, evil.

Or am I missing something?

Because otherwise the unit energy recipient will not have its unit when needed, and it might freeze. The drowning analogy is very apt.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 10:46:15 AM EST
[ Parent ]
The producer has sold an amount of production - say 30,000 MwH - forward and has committed to exchanging his production - if there is any - to anyone who presents these units (essentially redeemable shares which carry no rights to income) in exchange for energy actually supplied.

This isn't a futures contract, where a contract owner/holder could demand delivery, and the turbine may then default. What happens here is that when delivery by the turbine actually does take place, units may be exchanged instead of conventional money, thereby allowing the turbine owner to "redeem" the units and cancel some of the obligations of indeterminate duration he took on to fund the turbine.

If the turbine is down, then customers in possession of units have to get their supply from someone else (a utility?), who may or may not accept energy units in exchange, which they probably would if the rate was less than that they are accustomed to paying the turbine for its excess capacity.

But there is no need for customers to sell the units: they may simply keep them and use them at a later date.

The risk is that the turbine cannot produce - over its life - sufficient energy to redeem all of the energy units sold.

"Overselling" is a form of "evil" which the investment banks who put projects together, and energy market regulators, would have to prevent.

Underproduction is a different issue, and if (say) the turbine was destroyed, then (mandatory?) insurance would kick in and compensate investors (through a buyback at market price) or pay for a rebuild etc etc

But there would be no "evil" double counting.


"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 12:29:53 PM EST
[ Parent ]
ChrisCook:
The risk is that the turbine cannot produce - over its life - sufficient energy to redeem all of the energy units sold.
Do you really propose to sell energy units, or fractions of actual production? I assumed the latter in the comment where I crunched the numbers, in which case the risk is that the energy that the shareholder is entitled to over the life of the turbine will amount to less than the money invested would have been able to buy at market prices. That is, the risk is not that energy units won't be redeemable, but that the amount of energy per share will be less than originally expected.

Selling the actual energy production forward differs very little from selling a revenue amount forward. I thought your model involved selling shares of production, whatever that will be in the future, rather than selling a fixed amount of KWh.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 12:42:40 PM EST
[ Parent ]
Ideas develop over time, and I bore people on ET quite enough without airing every development.

It wasn't that long ago (a few months) that it occurred to me that there are two forms of "Equity" possible:

(a) Proportional shares, giving indefinite rights to streams of production; and

(b) "Redeemable" shares redeemable in units of production, but not conferring any "income".

One could do either, or both, technically, but that could get messy.

But it's the "units" that have the most potential I think.

Selling the actual energy production forward differs very little from selling a revenue amount forward.

True. Because "revenues" consists of the sale proceeds of energy expressed in conventional currency.

But denomination in MwH and Btu equivalent etc could allow us to integrate the energy content of carbon based fuels into a coherent "carbon dollar" market and an "energy clearing union" framework.

As opposed to the trading/clearing of units of carbon content of CO2 brought to us by intermediaries.

The creation of pools of energy units in this way gives us the basis of a globally fungible asset class.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 01:42:28 PM EST
[ Parent ]
Assume that inflation is stable and all the figures are inflation-adjusted.

At €25/MWh you need 800 MWh to cover the €20k fixed costs. This is at most (assuming 2000 MWh/yr) 40% of the production. This leaves you with 60% of the production to sell to investors. Since the investors put in €1.5M, each €25k of investment buys them 1% of the output. How much is this worth?

1% of the output is between 20 and 30 MWh/yr, at 25 to 75 €/MWh, for 20 to 25 years. That is between €10k and €56k total. Over 20 years, though, variations will average out to between €19k and €22k total. This always loses money compared with 25k, but that is because you have offloaded the entire risk to the investors.

If instead you say that over 20 years the average price is unlikely to drop below €40/Mwh so you need only 500 MWh/yr to cover fixed costs; and arguing the 20-year average output is unlikely to drop below 2.4 Gwh/yr, you only need 21% of the production to cover costs and you can sell on 79%. Then each 19k of investment buys 1%, and returns 19k to 22k total at 95% confidence, for about 1.5% return above inflation with no downside.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 07:21:21 AM EST
[ Parent ]
so why should anyone invest in this when they can get the same return with much less risk by investing in government bonds?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 07:47:44 AM EST
[ Parent ]
But how can you reasonably offer anyone a higher return than this anyway?

The extreme case is where you assume a €75/MWh wholesale price so you only need 267 MWh/yr to cover your fixed costs, and assume 3GWh/yr production, enabling you to sell 91% of the production so 1% of production (returning 19k to 22k) costs €17k. this is still 1.5% per year above inflation, tops.

How can you issue debt on this project at more than 4.5% yield?

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 07:56:36 AM EST
[ Parent ]
thus the need for PTC, unless you make much higher hypotheses on electricity prices.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 08:17:18 AM EST
[ Parent ]
What is PTC and how does it allow you to issue debt at higher yields?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 08:49:58 AM EST
[ Parent ]
See the body of the diary: it's a tax credit for each kWh produced, which allows wind projects to get more income for their production without having to sell their production at prices higher than the market will give them.

Typically, a wind project will sell its electricity to a local utility for 3-4c/kWh (usually under a long term fixed price contract) and get an additional 2c/kWh (inflated) via the PTC for the first 10 years.

The higher (and very stable when you have a fixed pirece power purchase agreement) revenue levels make the project able to service debt even during periods of low wind. The cash waterfall is simple: revenu is used first to pay ongoing operating costs, then debt costs (which are fixed if you used a fixed interest rate), and whatever's left, which is likely to be quite volatile goes to the investor.

Depending on the project, the investor and the country, debt can cover 70 to 90% of the initial investment.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 09:39:49 AM EST
[ Parent ]
So we're talking up to a 40% subsidy for the first 10 years?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 09:47:45 AM EST
[ Parent ]
you could say that, I suppose. You might want to add the budget of the DoD, highway patrol etc..., to the price of oil, and you'd suddenly get a subsidy of several hundred percent to oil producers.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 09:51:45 AM EST
[ Parent ]
Comparing a tax credit with the DoD budget is not exactly apples to apples.

What you're saying is that wind needs a wholesale price of $50 to $60 per MWh but that the wholesale price that can be locked in with long-term contracts is $30 to $40.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 09:56:04 AM EST
[ Parent ]
And so was I.

And the reason long term prices cannot be locked at higher levels is because it is difficult to force utilities to buy power at a higher price than they can get from coal-fired plants, especially older ones that have been grandfathered and do not have to fulfill all pollution and emission requirements and have to pay neither the environmental damage of strip mining, mountaintop removal or global warming.

So yes, I object to any expression that makes it look like wind gets huge subsidies.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 10:03:47 AM EST
[ Parent ]
On the other hand, if you issue debt you need at least €75k/yr just to repay the €1.5M principal, and that adds to your fixed costs, so if you're not able to produce more than about €100k on any given year (say, the if the wholesale price drops below €35/KWh, or even below €50 with bad wind year) you have a serious risk of default.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 07:50:41 AM EST
[ Parent ]
Actually, the second case is 0.75% return over inflation.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 07:55:47 AM EST
[ Parent ]
Let's compare with a 1GWh nuclear reactor assuming the same wholesale prices. What are the up-front capital costs, operating costs, fuel costs and waste treatment and decommissioning costs?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 09:49:51 AM EST
[ Parent ]
Les coûts de référence de l'électricité

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 09:59:55 AM EST
[ Parent ]
I'd be interested to know where the technology is on the efficiency of local generation by both wind and solar for large buildings such as high rise apartment blocks etc.

While wind may fluctuate and thus may not be a reliable conitnuous supply, there is surely a direct correlation between solar energy and AC. ie if you need the latter, you have the former available.

Are there also structural problems of wind torque upon such buildings?

Of course the principle problem is that there are no incentives to developers to either design buildings to be energy-efficient, nor energy-sufficient. They build them, they sell them: they don't have to pay the energy bills for the next 30 years.

You can't be me, I'm taken

by Sven Triloqvist on Sat Jan 19th, 2008 at 04:29:21 AM EST
Re: "Some will say that wind farms are ugly. I don't have an argument against that,"

Most thought the Eiffel Tower was hideous when Gustav built it.

by The3rdColumn on Sat Jan 19th, 2008 at 11:50:39 AM EST
Well this has been a fantastic and illuminating ding-dong battle! Best I've read in a long time - thanks to Jérôme, Chris and Migu.

I'm amazed at peoples aesthetic objections to wind turbines. To me, they are clearly more beautiful than electricity pylons, high rise apartments, MW towers and skyscrapers. The only reason people have against them is novelty, as you imply.

You can't be me, I'm taken

by Sven Triloqvist on Sat Jan 19th, 2008 at 01:28:10 PM EST
[ Parent ]
Well I've certainly enjoyed it, and with not a troll rating in sight! Just the odd "casual insult", apparently, and those are often just a matter of perception.

Give me a string of wind turbines against a string of spaghetti-festooned pylons any day, but I'm not keen on seeing turbines on high skylines.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 01:47:23 PM EST
[ Parent ]
well, my policy is to never ever troll rate someone you're discussing with. Disagreements, even strong ones, should be expressed explicitly. I think we did that!

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 02:00:47 PM EST
[ Parent ]
Agreed!

Always a pleasure to engage with you...it helps me refine my thinking.

...that's a casual compliment btw ;-)

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 02:18:24 PM EST
[ Parent ]
It's funny how people have conspicuously refrained from tipping either of us above. Either they don't understand a thing, or they really don't want to take sides...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 02:48:04 PM EST
[ Parent ]
Oh maybe we're both talking bollocks!

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sat Jan 19th, 2008 at 03:07:15 PM EST
[ Parent ]
This was an excellent argument from two professionals. Hard to rate. i don't understand all of it, but I see valid points on both sides. My main bone of contention is that you, Jérôme, demanded factual examples of how this new vísion could work while doing little to explain your own methods. i think we are owed an explanation as to exactly what service you bankers provide, and why it is better than the model that Chris has described.

I know you are a unique and very special banker, but please tell us why you are not like the rest.

You can't be me, I'm taken

by Sven Triloqvist on Sat Jan 19th, 2008 at 04:07:04 PM EST
[ Parent ]
I'm still partial to the idea that the resistance is class based - ie, only the poor should be living within view of power generation.

you are the media you consume.

by MillMan (millguy at gmail) on Sat Jan 19th, 2008 at 03:45:35 PM EST
[ Parent ]

Red Herring of base loads Nuclear Power

During inevitable low wind periods, the National Grid would do what it did this Christmas when half the nuclear power stations in this country were out of action - they would simply start up existing coal or gas stations (already built and paid for or their replacements), which are held in readiness for this very purpose to back up nuclear.

Other techniques, all used already to a greater or lesser extent in this country and around the world, routinely deal with the sudden loss of power stations, or with TV programme load surges. The lights do not go out. Standard every day methods include automatic shedding of non urgent loads, energy storage, use of tariffs and smart meters to influence consumer consumption patterns, inter-country connection of power grids, and surprisingly little known perhaps, in France, USA and UK the calling up of vast numbers of small diesel generators, already owned for private local emergency use and these can be readily extended to deal with the increased uncertainty due to a large amount of wind generation.

In fact the largest potential cause of sudden power loss in Great Britain is Sizewell B nuclear power station, and it is the size of that station, 1.3 GW, that sets the fast reserve generation margin. Nuclear simply is not base load - these nuclear power stations must stop both in an emergency and for regularly planned reasons and therefore themselves need back up.

In the theoretical but possible case that fossil fuel fired reserve supply and other energy management techniques were used to back up an otherwise close to 100% wind power regime, carbon and other emissions would be cut to a fraction of present levels, whereas the new nuclear build can bring a mere 18% reduction from the generation sector and 4% of all UK emissions.

A recent Irish study (2008 All Island Grid Study. Study Overview, Department of Communications, Energy and Natural Resources. Department of Enterprise, Trade and Investment) has shown that close to 50% wind energy is possible.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 06:07:46 PM EST
All,

While the PTC is often sited as the main subsidy (especially for wind sites with 8 m/s hub height average wind speeds), the wind industry also gets by on a couple of others. These are the sale of REC's (Renewable Energy Credits, alias Green Tags) and the MACRS (Modified Accelerated Credit Recovery System). Basically, the MACRS allows the wind turbine capital (the complete installed cost, not just the turbine, but not including any transmission line stuff) to be fully depreciated in 6 years, with 52% of this in the initial 2 years. Adding in interest on the loan for the project, wind turbine achieve huge "paper losses" in the initial 5 years, and these losses can be deducted from the taxable income of the investors, who for these projects, are typically in the 35% tax bracket. The MACRS deductions work for any kind of income; the PTC credits only work for passive (i.e. rental) income.

REC prices vary by region, being close to zip in the midwest to ~ 4 c/kw-hr in some parts of the Northeast. Last year the NY State government auctioned off a large blok at 1.5 c/kw-hr; this gets added on to the price of the electricity. In some states like NY, the electricity market is a bit like a semi-rigged casino - prices for electricity in future times are unknown, but the BET is that they will go up. Thus, a 330 MW wind farm (done partly by Goldman Sachs) was set up in NY strictly on a gambling basis - i.e. merchant price. Odds are, that was a good bet. In the midwest, where most power is still made via coal, that would not work.

So, to wrap it up, the PTC is a 2 c/kw-hr tax credit. It's value to really wealthy investors can be up to 2.6 c/kw-hr, or so I have been told. The MACRS deduction works out to be worth about 2 to 2.5 c/kw-hr over a 10 year term - though it is returned in a (mostly) 5 year term - so this has even more value.

Finally, almost all of the benefits from wind turbines in the initial 10 years go to the wealthiest of the wealthy - really rich people and corporations with passive income, and who would otherwise have to pay large amounts of taxes. There is a bit of a gamble here, too, because the financing of these projects assumes that the owners/investors WILL have huge taxable incomes for up to 10 years in the future. This system effectively excludes 98% of the US from investing in wind turbine projects via pooled resources. However, with some special economic and legal manuvers, some community/small investor ownership is possible in projects after the initial 10 year period.

It's a crazy way to finance wind turbines, but it is better than nothing. The German Feed In Law seems to be orders of magnitudes more logical and effective. Odds are, if that were in place, 2007 installed capacity would have been equal to that of the entire world for 2007, just in the US (~ 15 GW), and it would be climbing at ~ a 50% annual rate.

Nb41

by nb41 on Sat Jan 19th, 2008 at 06:34:05 PM EST
I'm not exactly sure what your point is, given that you seem to be discrediting the PTC and accelerated depreciation in your first paragraphs.

The entire PTC scheme was based upon building corporate finance for windpower, and while you're correct in thinking a Feed-In law would have been more effective, analysts argue about the degree.  But if you want to argue the US incentives, you must take into account all the various subsidies the PTC counters, including, but not limited to, accelerated depreciation via the oil depletion allowance.

Regarding your final point, 2007 installed capacity would never have equalled the entire world, nor would there be 50% annual growth (though it's a beautiful dream), because the component supply chain can't grow that fast without orders of magnitude investment.  There's only so much steel being forged or cast, and copper being wound.

And the benefits of windpower don't go to the "wealthiest of the wealthy - really rich people and corporations with passive income."  The benefits go to the entire planet, including humans.  While any company with income, not just passive, gets to shelter it BY THEIR INVESTMENT.  I mean, $10B in 2007 didn't just come from coupon clippers.


"Life shrinks or expands in proportion to one's courage." - Anaďs Nin

by Crazy Horse on Sat Jan 19th, 2008 at 06:55:06 PM EST
[ Parent ]

almost all of the benefits from wind turbines in the initial 10 years go to the wealthiest of the wealthy - really rich people and corporations with passive income, and who would otherwise have to pay large amounts of taxes.

This is simply not correct. People (or, more usually, corporations) with large tax liabilities are needed in the scheme, so that someone can deduct the PTC from an existing tax bill, but these tax investors then pass on most of the gain back to the wind project, and only keep a small fee for having made their balance sheet available.

The subsidy does go to the wind project.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 20th, 2008 at 05:48:28 AM EST
[ Parent ]
Since one of the biggest "complaints" in the US is over the unsightliness of windmills I thought you might find this photo I took in the hills of West Virgina interesting.

I think the windmills add to the scene...



Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Sat Jan 19th, 2008 at 06:37:25 PM EST
Given that West Virginia wilderness has been destroyed by top mining and the entire liturgy of coal technology, your photo takes on added beauty.  Danke.

"Life shrinks or expands in proportion to one's courage." - Anaďs Nin
by Crazy Horse on Sat Jan 19th, 2008 at 07:01:01 PM EST
[ Parent ]


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