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Re the EU Public Consultation on gas

by Jerome a Paris Wed Dec 30th, 2009 at 08:45:33 AM EST

The EU had an public consultation last year concerning measures to safeguard security of natural gas supply (it closed last March), which focused mainly on how to organize solidarity towards members that would be cut off in their gas supplies. I've been writing about this with an other purpose in mind, but it would have been useful to send them this back then:

Current market mechanisms in the European electricity sector are fundamentally biased towards gas-fired power plants. As statistics show, other than wind, nothing else but gas-fired generation capacity has been built in Europe in the past 10 years. Wind did get built because it benefits from mechanisms that protect windfarms from the normal market rules, whether these were FITs or ROCs or other.

While it is possible to continue on such a basis, it might be worth raising the issue of new rules, applying to all, that completely change the landscape and end up favoring wind over gas in a much more "natural" way.

The reason gas-fired plants are preferred is two-fold: one of cost, and one of risk, both linked to the way prices are formed:

  • cost-wise, gas-fired plants are much less capital intensive than others (in particular windfarms) and thus they are less penalised by the fact that the sector is now funded at a cost of capital that must reward private investors over their shorter horizons rather than be borne by public entities over long maturities. "Letting the market decide" means a systemic tax on capital-intensive technologies. Within a market-based system, a solution might be to argue for public funding (without any risk taking) for the sector through banks, like Germany did for the onshore sector in the past. Such funding could be made available to all technologies - and would thus be "neutral" - but would benefit wind most, as well as nuclear - they could be a useful lobbying ally in that respect, if that's a palatable idea...
  • risk-wise, gas-fired plants are much less likely to be "underwater" for long periods of time (ie stuck with production costs which are higher than market prices), given that most of their costs come from fuel and that they tend to be the price-setting technology in most markets under merit-order rules. Wind, with largely fixed costs (debt repayment) is much more at risk. In fact, its average cost being lower is not sufficient: its costs need to be lower than the expected cost of gas-fired plants at low gas prices for the investment not to be unduly risky, in the absence of price protection mechanisms (whether FITs or long term PPAs). "Economic" and "profitable" are not the same thing, and gas is more profitable for investors even though it tends to be more expensive in the long run. Mechanisms to protect against this bias of markets towards short term profitability are thus necessary - and can be defended both using security of supply arguments and economic arguments. Floor prices are a solution (and FITs work well in that respect), as can be a price for carbon, which adds a fixed component to the cost of gas-fired electricity.
I've been making this argument at various conferences and venues over the past months, and every single time, people appear stunned by it. Describing the reality that Europe, if you exclude the special-regime renewables, is building exclusively gas-fired plants seems to surprise absolutely everybody other than industry insiders. Presenting why financing modes matter so much similarly comes as a striking insight. What's most depressing to me is that nobody else ever makes this very basic point.


Display:

Commission launches consultation on EU 2020: a new strategy to make the EU a smarter, greener social market

The Commission today issued a public consultation document on giving the EU economy a brighter future through the EU 2020 Strategy. EU 2020 aims to deliver greener and socially inclusive growth, as outlined by President Barroso in his Political Guidelines. The new Strategy will build on the achievements of the Lisbon Strategy, while learning its lessons. The consultation paper sets out a vision for how EU 2020 will focus on entrenching recovery from the crisis, helping to prevent a similar one in future and on three thematic objectives: creating value through knowledge; empowering people in inclusive societies; and creating a competitive, connected and greener economy. The deadline for responses to the consultation is 15 January 2010. The new Commission will then make a detailed proposal to the Spring European Council.

(...)

Creating a competitive, connected and greener economy

The future will see high energy prices, carbon constraints and greater competition for resources and markets. All of these are risks but also present opportunities to create a "new" EU 2020 economy with a strong global competitive advantage. New greener technologies can stimulate growth, create new jobs and services and help the EU meet climate change goals. On the other hand, failure to adapt to the 21 st century would see Europe decline.

The policies at EU and national level to promote eco-innovation and energy-efficient products and systems should include emission trading, tax reform, subsidies and loans, public investment and procurement and targeting of research and innovation budgets.

Europe needs smarter transport infrastructures and an EU wide 'smart grid' for energy, as well as 100% broadband coverage as soon as possible. The EU and Member States should work together to make the right strategic investments to make two-thirds of electricity generation both low carbon and more secure by the early 2020s.

Manufacturing will remain critical to the EU's future economic success. But Europe needs a new industrial policy emphasising innovation capacity, new technologies, skills, fostering entrepreneurship and "internationalising" SMEs. Excess capacity in some sectors must be tackled. Those adversely affected will need to be supported.

It's broader than the energy sector, but it's still something we could comment on...

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

by Jerome a Paris (etg@eurotrib.com) on Wed Dec 30th, 2009 at 08:52:00 AM EST
There's a very basic argument to make on social and green markets and that is that you can't make markets green and social without structuring them. Making markets 'free' and then forming some ad-hoc compensatory public policies to lessen the deleterious effects of 'free' markets is not the same.
by nanne (zwaerdenmaecker@gmail.com) on Wed Dec 30th, 2009 at 09:47:20 AM EST
[ Parent ]
or are they just mods of coal and oil burners?

it is bizarre, this surprise from near-insiders. it sounds like the real insiders have it sewn up, but are downplaying that fact, muddying the waters.

as regards re-structuring the grid, would that be important for nuclear as well, or just solar/wind?

if proposals have to be in by the 15th, that leaves very little time...

it would be interesting to see a list and some details of the ones already sent up for review, if they're online.

they're all experts at sounding like real, radical change is what they want to happen right away, and i know this is huge, and will displace/replace all kinds of workforces, but it still seems mostly rhetoric.

while most of the public remains comfortably numb, i expect it's pretty easy to keep the wool firmly over their eyes about the big energy picture for europe. thereby milking them till the end on the present system, as long as it lasts, (and we continue to get along with the russians).

if they are seriously expanding the gas systems here, and keeping their heads in the sand about its longterm sustainability, while throwing the occasional, now-you-see-it, now-you-don't crumbs of incentives to a pretty clueless, incurious, and passive public, expecting bizniz as usual till the last drop of fossil fuels are burned, then i really wonder how much misinfo-ganda it's going to take to keep the boat from rocking, as prices continue to rise, wages to fall, and unharvested wind and sunshine continue to produce themselves abundantly right in front of our glued-to-the ground eyes.

still the only way to see how token these efforts to change are is to answer them. i wish there were a group of 100 Jeromes and Crazy Horse's to brainstorm this offer, flooding their desks with hundreds of meticulously prepared business plans, and Chris Cook along to show them new ways to afford them.

it's not the middle class we need to worry about so much as the middle-men class. are they all going to retire with their loot, running gentlemen farms and collecting art, or learn to grow veggies under the windmills with the hoi polloi?

there are going to be tens of thousands of risk-pushers and margin-shavers needing new employment, what are we going to do with them?

:)

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Dec 30th, 2009 at 10:42:07 AM EST
[ Parent ]
A typical generating system powered by natural gas is a gas turbine engine connected to a generator. It's basically a jet engine like what's used on airplanes, with a gearbox (like what's on a turboprop airplane) and a generator. They're not the same engines as used on airplanes because the operating conditions are different, but they work pretty much the same.

Installation is standardized and fast. They can be started and shut down at a moment's notice, and can be throttled up and down depending on load. They're efficient and reliable, and burn a fuel that is, comparatively speaking, pretty clean. They come in different sizes.

by asdf on Wed Dec 30th, 2009 at 11:54:15 AM EST
[ Parent ]
thanks asdf.

so is the biggest problem with them the special docking gas tankers need, and pipeline security?

they're still flaring off great plumes of it with no gain, right?

how long will it last, or is that an oil drum question?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Dec 30th, 2009 at 09:53:04 PM EST
[ Parent ]
I don't know anything about the natural gas business. Presumably there's not much flaring of it any more, but maybe in some cases its more work to capture it than it's worth. The natural gas enthusiasts say that there's lots still left, particularly in North America, but who knows...
by asdf on Thu Dec 31st, 2009 at 01:51:52 AM EST
[ Parent ]

Regulatory aspects of the integration of wind generation in European electricity markets

As Member States (MSs) come under increasing pressure to deliver low-carbon, secure forms of energy, focus continues to rest on the deployment of renewable energy. Given the natural resources available and the associated costs, many MSs are concentrating their efforts on increasing their deployment of wind generation.

European energy regulators are considering these issues to ensure that the regime facilitates the deployment of wind generation and does not inhibit market integration. The purpose of this report on Regulatory aspects of the integration of wind generation in European electricity markets is to present European energy regulators' thoughts on how wind generation should be integrated into the market and network arrangements and to highlight areas for further consideration in light of its increasing deployment.

This paper should be considered as a first step in discussions with stakeholders. The ideas presented in the paper should not be considered to represent CEER's definitive position on the subject. Rather, the report is intended to highlight the most important issues in integrating wind generation and to seek feedback from stakeholders as to how they should be addressed. In some areas, CEER points out principles that it considers to be relevant and on which it would welcome feedback. In many cases, detailed work on a particular topic relates to areas considered by European energy regulators. The conclusions from this consultation will serve to inform regulators' future work and understanding of the issues as they affect wind generation.

CEER invites all stakeholders interested in the regulatory implications of integrating wind generation into European electricity markets to respond to this consultation, both in general and in relation to the questions in Section 1.4 of the report.

Interested parties are invited to submit comments by 18 February 2010 and these should be sent by e-mail to:  wind@ceer.eu.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Dec 31st, 2009 at 06:25:26 AM EST
[ Parent ]
Renewables are, sorry to say, a smokescreen for fossile fuel interests.
Take the German example : under german law solar and wind are heavily subsidised via feed in tarrifs, which is expected to result in a grid that is about 10% renewable one of these days - This means that said grid would still be 70% fossil and 20 percent nuclear, and the projected costs to the German state of the current policy of feed in tariffs for renewable electricity are sufficiently high that if this money were invested in building EPR's via cash financing instead, the result would be the creation of a german sister to EDF- A wholly stateowned and debtfree utility with sufficient reactors to power 100 % of German demand. - Which would rather bankrupt, eh, all, the existing utilities. (because competing with a reactor which has had its capital costs written off is impossible. )
by Thomas on Fri Jan 8th, 2010 at 05:20:41 AM EST
[ Parent ]
EDF- A wholly stateowned and debtfree utility with sufficient reactors to power 100 % of German demand. - Which would rather bankrupt, eh, all, the existing utilities.

Which is why the European Union in its attempt to create a "market", is trying to break EDF's monopoly, over which our Jérôme regularly throws a fit.

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

by Migeru (migeru at eurotrib dot com) on Fri Jan 8th, 2010 at 05:56:41 AM EST
[ Parent ]
Subsidising via feed-in tariffs?

The French, Italian and German experience with take-or-pay contracts for gas (essentially a form of feed-in tariff, but with GazProm instead of the states) is that it gives cheaper and more secure supply than trading it on the spot market.

The Danish experience is that feed-in tariffs give cheaper electricity.

See also: Why wind needs feed-in tariffs (and why it is not the enemy of nuclear).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jan 8th, 2010 at 01:27:03 PM EST
[ Parent ]
I doubt that any opinion you voice would be heeded by the decision makers. After all, if your argument is that the status quo is wrong, you are obviously not a Serious Person and can be ignored.

Nevertheless, if you're making this argument at conferences where the advisors to the Elites gather you are doing good. Tho' as we have mentioned before, it's hard to believe an argument when your paycheck depends on you disregarding it.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Wed Dec 30th, 2009 at 09:12:08 AM EST
Perhaps J's voice is not yet heeded, though one can argue it certainly is in the process already, but at least he is taken seriously and is listened to.  There are also many decision makers in both the public and private sectors who are making real noises about turning the Titanic around.  In your neck of the woods, was it the ex-chief of the BoE who called for real reform of banking, and Ed Miliband himself calling for a restructuring of energy markets?

I think it makes much sense to draft an input to this EU process, and I for one would help craft it.

(Can't believe i'm drawn to comment less than 24H after last night's OT.  Nice work, J.)

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

by Crazy Horse on Wed Dec 30th, 2009 at 10:03:31 AM EST
[ Parent ]
When the ex-chief of the BoE calls for reform, don't assume it's the sort of reform we think is necessary. Anymore than Greenspan or Bernanke could be assumed to reform the US financial system in a useful manner.

their agenda is not ours.

Ed Milliband is one of the better people at the top of the Labour party. Sadly he defers to his elder and more conservative brother too readily.  

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Wed Dec 30th, 2009 at 10:12:09 AM EST
[ Parent ]
heh, insert cliche about darkest hour etc!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Wed Dec 30th, 2009 at 11:52:07 AM EST
[ Parent ]
I usually conclude my presentations with two slides that make people react:

  • one is a sweet one that says European energy policy can be summed up in 2 sentences: "what is our gas doing under your tundra" and "a jobs programme for City bankers"
  • one is a quick summary of the contradictions of current policies (why say you're worried about Russian gas when your current policies are all about building more gas-burining plants / if energy is strategic, why the longstanding attempts to break up the national champions that have proved they work / if cheap energy is a goal, why the refusal to act on the cost of capital, which is the single biggest driver?

And I make it clear that this is a fight between the British (and Americans) on one side and the French and Germans on the other:

"France has the cheapest electricity, the lowest carbon emissions, the most diversified gas supplies, why is European energy policy about breaking EDF and GDF?"

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

by Jerome a Paris (etg@eurotrib.com) on Wed Dec 30th, 2009 at 12:24:33 PM EST
[ Parent ]
I'm unclear as to what America has to do with it...

And there is the ugly little side issue of France's colonial exploitation of Niger as a nuclear fuel source, and the question of nuclear waste disposal. Wind is fine, but France's low carbon emissions and cheap electricity come with a social cost that is not being factored in...

by asdf on Wed Dec 30th, 2009 at 03:32:39 PM EST
[ Parent ]
this is about the neolib, corporatist, bankers-first ideology which has been largely promoted out of the City and Wall St - using "UK and US" is indeed an unpleasant shortcut, sorry.

As to Niger, I'm all in favor of "full accounting" for all energy sources, as this can only make renewable energy look better, overall. I'd note that given the much lower portion of fuel costs in nuclear, the social impact of the extraction of uranium has to be much lower than that of fossil fuels; I'd also note that the majority of the uranium used in France comes from Canada, Australia and the former Soviet Union...

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

by Jerome a Paris (etg@eurotrib.com) on Thu Dec 31st, 2009 at 06:18:37 AM EST
[ Parent ]
More of the same: Office Map
by jayjay (jeremy [at] will-hier-weg.de) on Thu Dec 31st, 2009 at 08:15:01 AM EST
[ Parent ]
you can only link to files which are on the internet - you seem to have linked to an address on your own computer. If you send it to me by email, I can post it.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Dec 31st, 2009 at 09:14:21 AM EST
[ Parent ]
my bad (should no better)

From Divers
by jayjay (jeremy [at] will-hier-weg.de) on Thu Dec 31st, 2009 at 10:56:11 AM EST
[ Parent ]
I do not get how this can be so strange to people with a minimum knowledge. I teach energy efficiency in class (including energy policy), and when we talk about the cost of making a transition to a less-polluting technology it is one of the first things that comes.

The front-cost of capital makes wind and natural gas plants two different worlds, where it is very difficult to compare which one is better from a cost-benefit perspective...

This is teh reason why there exist energy policy... you can not remain neutral... pretending to be neutral is not neutral.

the same goes fro taxing CO2.. nto taxing CO2 is no t aneutral position, it is not letting the market work freely.. it means considering that the cost of the externality is zero, or that the life of future generations is practically not worthy (either because they will be so advance that global warming does not matter, or because you just do not care about future generations)

This I teach to undergrads... I guessed most people with a degree would know about that already.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Dec 31st, 2009 at 11:32:28 AM EST

pretending to be neutral is not neutral.

not trivial at all.

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

by Jerome a Paris (etg@eurotrib.com) on Thu Dec 31st, 2009 at 05:00:30 PM EST
[ Parent ]
kcurie:
The front-cost of capital makes wind and natural gas plants two different worlds, where it is very difficult to compare which one is better from a cost-benefit perspective...

It does if you use deficit-based fiat currency as a pricing denominator.

But if you unitise/monetise energy - through the simple expedient of enabling producers to create units redeemable in payment for it - then the calculus changes. There are tens of billions of dollars looking for a 'hedge' against rising energy prices denominated in dollars. These funds may be deployed through direct 'Peer to Peer' investment in unitised renewable energy and energy saving projects. These may therefore be financed through receiving value now in exchange for Units which cost the issuers nothing to redeem in the future.

Unlike gas project investment.

As I said recently here.

Anyone capable of understanding Air Miles or Tesco Club Cards can understand unitisation of energy.

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

by ChrisCook (cojockathotmaildotcom) on Fri Jan 1st, 2010 at 12:40:45 PM EST
[ Parent ]
expecting that your peer-to-peer market utopia can replace what is fundamentally a political decision to impose, through regulation, a longer time horizon for investment in some sectors. Not. Gonna. Work.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Jan 1st, 2010 at 12:59:01 PM EST
[ Parent ]
Jerome a Paris:
expecting that your peer-to-peer market utopia can replace what is fundamentally a political decision to impose, through regulation, a longer time horizon for investment in some sectors.

Not.Gonna.Work. eh?

Do you really believe that this deficit-based financial system can be re-instated? If so you are living in fantasy land. Humpty is nevr going to be put back together again.

Tell me how a 'for profit' global market can be adequately regulated without a global government?

Not.Gonna.Happen.

Peer to Peer? Is happening now.

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

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 07:06:36 AM EST
[ Parent ]
Project finance does not end up creating any new money, overall. It's perfectly sustainable as it is about spreading the cost of investment over time. It's working, it's survived every crisis of the past 30 years unscathed, and it gets projects built. It can be used to get government-driven, government funded projects done, or private-sector funded, private-sector-led projects.

And it's a lot more flexible than your Redeemable Units proposal, which makes no sense for many of the stakeholders of a project: manufacturers and builders are not interested in these units as they need to deal with the rest of the world and the rest of the world does not use such Units.

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

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 3rd, 2010 at 08:56:09 AM EST
[ Parent ]
When have I ever said that what you do does not work or is not valuable? It's exactly the sort of banking as a valuable service that I advocate. But you are constrained - you say so yourself - by a shortage of capital.

You are making the classic conservative argument against anything new.

"Nobody will use it because nobody is using it."

Moreover, you are once again agglomerating development finance with long term finance when - as I have said at least a dozen times by now - these are like Chalk and Cheese.

Unitisation of existing assets - the replacement of secured debt with a new form of quasi equity thereby - is IMHO a killer application capable of changing the face of global finance through:

(a) Resolving the Credit Crunch - through refinancing unrepayable property debt;

(b) Financing the transition to renewables through unitisation of energy.

Development financing will take more time to evolve from the conventional debt/equity model, since it will require a change in the enterprise model, and a new approach to equity investment.

What unitisation of existing assets would do for you as a project financier is to free up your development credit for assets you wish to finance. In other words, to recycle your capital.

There is a huge pool of funding out there looking for direct investment in energy. Assuming that there is a suitable framework of trust, which IMHO requires a decentralised clearing union, rather than a centralised clearing house, do you think that the Chinese and Japanese (for instance) would rather hold T Bills or Units redeemable in payment for gas supplied?

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

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 10:21:33 AM EST
[ Parent ]
is a fairly traditional tool in project finance. For instance, most of Gazprom's new pipelines are not financed on a standalone basis (that's still sen as too risky), but are backed by the revenue streams from existing pipelines and associated exports.

Structured commodity export finance is the same - financing collateralised by existing export revenues (which can then be used for further investment or for other corporate purposes).

During the bubble years of 2005-2007, project finance banks did try to recycle capital by creating CLOs (collateralised loan obligations) - effectively bundling portfolios of project finance assets and "unitising" them, ie creating securities against the portfolio of revenue streams from these projects.

The market for that is dead due to the crisis, but I peronally think it's dangerous: one of the reasons project finance is safe is that banks keep the paper on their books; if they begin to be able to dump it on other investors in ways that are not completely transparent (why care about specific clauses in a deal if  that deal represents only 1/100th of the portfolio for the ultimate owners) - pushed to extremes, we saw where that went with CDO ABSs.

Where I actually fundamentally disagree with you is that in the peer-to-peer mechanisms, there isn't anyone to vouch - by having skin in the game - the quality of the underlying projects. By having banks doing the lending and keeping the assets on their books, you do have that quality control. And as we know, this is a vital service.


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

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 3rd, 2010 at 10:34:25 AM EST
[ Parent ]
Jerome a Paris:
Where I actually fundamentally disagree with you is that in the peer-to-peer mechanisms, there isn't anyone to vouch - by having skin in the game - the quality of the underlying projects. By having banks doing the lending and keeping the assets on their books, you do have that quality control. And as we know, this is a vital service.

Why can't everyone have skin in the game? God knows that this has been the default outcome of the current fiasco.

Bank capital is scarce, and a lot scarcer in fact than current window-dressing discloses. I have always thought that you are a long-standing proponent of the State's role in infrastructure ownership and development. Yet you are saying here - as I understand it - that it is for banks to provide the role of guarantor rather than end user producers and consumers collectively, backed by States.

I believe that the global markets in energy should be explicitly underpinned by producers and consumers  collectively and backed explicitly by international government agreement. This could be achieved through the creation of 'International Clearing Unions', which would be global agreements (not organisations!) underpinning the creation, development and operation of productive energy assets.

I agree with you that quality control is a a vital service, and that banks could and should be providing it.

I just don't see why banks - rather than market participants generally - should put their capital at risk in order to achieve this. Although I do believe that the income that bankers receive in respect of the use of their 'Human Capital' should be performance related to avoid moral hazard.

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

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 11:18:32 AM EST
[ Parent ]
because these financial products are extremely complex and should not be bought simply on the basis of a rating. It takes a lot of analyst power to get comfortable with the underlying risk and such analysis should not be subcontracted.

Also, the lending group will need to take a lot of decisions during the life of the project, and project engineers should expect to be second guessed by a "parliament" of unknown investors who may or may not be available and who may or may not have the ability to understand what's at stake and what needs to be done. You need a small group of lenders managed by an agent who' able to do it job. Diffuse investors don't provide that. It creates very real operational risk, and I could give you several exemples from my recent projects where having to deal with more than a few other banks would have been a nightmare and would have put the project in serious trouble.

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

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 3rd, 2010 at 01:13:49 PM EST
[ Parent ]
The question is whether or not the production to be unitised will be there or not, but that is what your job is all about.

If a project is 'bankable' then it is 'unitisable', but the converse is not necessarily true.

Clearly, the same issues of governance and quality control will apply in both enterprise models, but I suspect that in a partnership enterprise model the necessary agreements will be an order of magnitude simpler.

Which may not appeal to everybody involved.

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

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 01:31:12 PM EST
[ Parent ]

 I suspect that in a partnership enterprise model the necessary agreements will be an order of magnitude simpler.

My professional opinion is that it will be the exact opposite. There are very good reason for the complexity, which comes from a thorough analysis of possible risks, available mitigation strategies, and eventual allocation.

And I say that as someone who has had to live with the complex project documentation I negotiated and was happy to enjoy its resilience most times.


f a project is 'bankable' then it is 'unitisable', but the converse is not necessarily true.

Again, my professional opinion is that it is the exact opposite. See my last point about agency roles. Dispersed "ownership" makes for decisions not to be taken when required.


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

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 3rd, 2010 at 02:24:41 PM EST
[ Parent ]
And yet 'dispersed ownership' will be the inevitable result of the technology we are using now. Have you not seen it in action already?

You, as a banker, provide a service - certainly in the analysis of risk, and, to a certain extent, the actuarial strategies. But from a societal POV, you are using the same methodology as would be used for a new sausage factory. The fact that the product you finance is 'good' is a coincidence. Or is it?

Putting together a movie or a TV series requires at least the same effort, disappointments, crassness, documentation, late night intensive sessions, and celebration of completion. We all work hard.

I've suffered the problems of 'dispersed ownership' in my dealings with Swedish companies. It CAN be exasperating. But it is also invigorating. It ensures that all views are heard.

Many of these 'views' are difficult to include. We elitists dismiss these views as anecdotal or irrelevant. They are, agreed, rarely fully informed. But they are the views of people who will be affected by the decisions taken.

It has been - prior to 1995 - possible to ignore the views of those who question the top-down nature of society and its subset, business. No longer.

Can I also add that you don't seem to read what people write. Chris Cook emphasised several times that air miles should be easy to understand as a meme, not that what he was proposing was equivalent to air miles. But no. Your argument was about the about the misfit of the analogy.

The technology that allows a French energy banker to start a very intelligent blog/forum is the same technology that will allow 'dispersed ownership'.

You can't be me, I'm taken

by Sven Triloqvist on Sun Jan 3rd, 2010 at 03:55:11 PM EST
[ Parent ]

The fact that the product you finance is 'good' is a coincidence.

That's the only part of all the above that I agree with.

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

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 3rd, 2010 at 04:23:20 PM EST
[ Parent ]
Well, naturally ;-)

You can't be me, I'm taken
by Sven Triloqvist on Sun Jan 3rd, 2010 at 04:45:02 PM EST
[ Parent ]
Jerome a Paris:
See my last point about agency roles.

There is no principal and no agent in a partnership relationship.

Jerome a Paris:

Dispersed "ownership" makes for decisions not to be taken when required.

The ability to share risk and reward within a partnership framework enables the rights and obligations of the property relationship thought of as 'ownership' to be distributed simply and effectively in new ways.

Having been involved among many other interesting projects, in:

(a) drafting and implementing the detailed contract rules of a successful global energy exchange;

(b) clearing house provisions relating to default;

(c) cross border clearing relationships;

(d) the creation of a globally applicable market user agreement in the context of a 'Dot Com'; and

(e) detailed development of new market products and trading mechanisms;

I have some idea about complexity and resilience in contractual relationships.

I also have getting on for ten years' experience of developing simpler consensual ways of contracting which may not yet be familiar to you, but which are entirely familiar (say) to any Japanese businessman.


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

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 04:48:22 PM EST
[ Parent ]
is that you do markets, that trade something that exists. Everybody is in the same position with respect to the underlying unit being traded.

The problem with projects not yet built is that they may end up not being built, or may end up being more expensive than expected. Someone needs to put up the money to build it, and someone may need to put up more money to get the project done. And production may be lower or higher than expected.

In other words, you don't actually know what you're going to be owning, and you don't know when you'll have it, and you need to know who will be taking decisions, and how, in the meantime.

Tell me who takes decisions in your mechanism, and how, during construction phase. Tell me who bears the consequences of such decisions.

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

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 3rd, 2010 at 05:25:09 PM EST
[ Parent ]
I have dozens of times on ET distinguished between the risks during development, and the risks inherent in developed flows of production and/or revenues. I do not have - and have never claimed - anything approaching your experience in development finance, but I do have enough experience to appreciate a class act when I see one and am always pleased to give credit where it is due.

More power to your elbow, say I.

I have been involved in several partnerships involving the development of intellectual property, and have a couple ongoing in 'real' property (ie land development), with agreement in writing from a major municipality that they will invest 1.5 acres of prime land in what will be a multi-million pound development - if it comes to fruition..... I also have several potential 'proof of concept' partnerships in energy all small scale and most at a very early stage.

But that is irrelevant.

My point - which I made up-thread, again - is that the real prize lies in refinancing - through unitisation - existing developed assets, with a view to releasing equity in 'Rental Pools' and 'Energy Pools'

This unitisation and the resulting debt/quasi-equity swap is what will change the game, and create new asset classes - which is my thing, of course, as you observe above, but unfortunately you do not follow through on that observation.

Unitisation of your completed projects is capable of giving you more ammunition for your project financing.

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

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 06:01:33 PM EST
[ Parent ]
I just don't see why banks - rather than market participants generally - should put their capital at risk in order to achieve this.

Amassing information costs time and money. By default, all participants operate with imperfect information, and having all participants amass perfect or near-perfect information in parallel would be hugely, ridiculously inefficient.

So you have to have a dedicated information-gatherer.

The dedicated information-gatherer has to be a neutral third party (because knowledge is power, and the role of refereeing based on that knowledge is power, and nobody within shouting distance of sanity wants to surrender that power to the other side of the table in a serious business negotiation).

The neutral third party has to put its ass on the line. Otherwise, it can just pull magic ponies out of thin air (see, e.g., Standard and Poor's, Moody's and their friends).

The simplest (if not necessarily the most elegant) way to make the neutral third party put their ass on the line is for them to give out a lot of money and only get it back if their judgement is sound.

This is a point that your scheme will have to address: How do you make the banks-as-service-providers go bust if they fail to perform due diligence?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jan 3rd, 2010 at 05:26:53 PM EST
[ Parent ]
The function you describe is common to both a conventional intermediated transaction model and a partnership model.

But it's not possible for an agent to act as a fiduciary for both buyer and seller, and if acting as a 'middleman' counterparty, then there are two adversarial relationships to negotiate.

Whereas a development partner can often consensually agree with the other partners - with whom he is working as a service provider - a share in the outcome of a collective project. This is not difficult to document, but is not always possible because people are human, and expectations diverge.

My experience is that a partnership enterprise model is capable of delivering an agreement possible in no other way, but it's not a magic bullet.

JakeS:

The simplest (if not necessarily the most elegant) way to make the neutral third party put their ass on the line is for them to give out a lot of money and only get it back if their judgement is sound.

The simplest way IMHO is to appoint a custodian of the project, of the fund flows, and of the purpose of the project. That does not make them a counterparty - merely a steward. Transparency to all stakeholders is essential, and indeed in everyone's interests.

JakeS:

How do you make the banks-as-service-providers go bust if they fail to perform due diligence?

By making some or all of their income - which is essentially the reward for the use of their 'human capital' - contingent upon the outcome.


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

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 06:25:10 PM EST
[ Parent ]
Electricity is time-critical infrastructure, like railways: It has to work and it has to work all the time.

Air travel is not, for the most part, time-critical infrastructure: You do not have cascading failure or other highly non-linear, highly inelastic costs of brief interruptions in service. So a system that imitates air miles will not necessarily work for electricity.

Furthermore, air miles are not a currency in the sense that you seem to imply. For one, they are not really convertible. For another, their primary function is neither as a store of value or as a means of transaction.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jan 1st, 2010 at 02:59:43 PM EST
[ Parent ]
JakeS:
Electricity is time-critical infrastructure, like railways: It has to work and it has to work all the time.

Air travel is not, for the most part, time-critical infrastructure: You do not have cascading failure or other highly non-linear, highly inelastic costs of brief interruptions in service. So a system that imitates air miles will not necessarily work for electricity.

I did not say anything about imitation of Air Miles.

The point about unitisation is that it makes payment, and the securing of price, entirely discrete from the securing of supply.

An Air Mile is redeemable in payment for air travel provided by a supplier who is a member of the system, in accordance with system rules.

An electricity Unit is redeemable in payment for electricity supplied by a producer who is a member of the system, in accordance with system rules.

Electricity Units already exist - and work - in the US as a prototype in paper form, and were recently launched in Holland as an electronic currency.

JakeS:

Furthermore, air miles are not a currency in the sense that you seem to imply. For one, they are not really convertible. For another, their primary function is neither as a store of value or as a means of transaction.

I didn't say either Air Miles or Club Card points were convertible/fungible: both are proprietary currencies.

I only say that anyone capable of understanding Air Miles or possessing (say) a Tesco Club Card is capable of understanding the concept of a Unit redeemable in exchange for value. The problem is that people are looking for complexities that are not there.

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

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 07:28:57 AM EST
[ Parent ]
air miles don't give you a plane ticket when you need it, but when it's available, and subject to variously painful conditions.

Unless you"re suggesting that we go to a world where electricity is only available erratically and unpredictably, and that we use it only when it's actually there, the comparison makes no sense.

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

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 3rd, 2010 at 08:58:32 AM EST
[ Parent ]
Securing supply is distinct from securing price.

What part of 'redeemable in payment for value supplied' is so difficult to understand?

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

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 11:29:40 AM EST
[ Parent ]
I didn't say either Air Miles or Club Card points were convertible/fungible: both are proprietary currencies.

Air miles is fundamentally not a currency. It's a kickback. The institutional support structure that maintains it is kept in working order because it's backed by the marketing department of a major corporation.

It's not a way to build a monetary system - it's a tool to introduce principal/agent problems in other organisations.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jan 3rd, 2010 at 09:31:35 AM EST
[ Parent ]
JakeS:
Air Miles is fundamentally not a currency

Air Miles - Wikipedia, the free encyclopedia

Air Miles UK

In the UK, Air Miles has eight million customers.[1] Airmiles can be collected through Lloyds TSB Airmiles Duo Credit Card accounts, Shell petrol stations, Tesco supermarkets, Southern Electric, travel products, package holidays bought in cash from Air Miles and over 100 online retailers.

The Air Miles UK website also provides an online shopping portal to a number of UK retailer partners also eBay.co.uk and Currys. Registered collectors can access retailers' websites via Air Miles Online Shopping and can collect points on purchases.

Airmiles can be redeemed for free flights with British Airways and other airlines, Eurostar and ferry crossings, cruises, hotel accommodation, car hire, travel insurance, package holidays, spa & golf breaks and UK leisure activities.

While Air Miles may not be exchangeable between customers - although as far as I know they can be used to provide tickets or benefits for other people - I would suggest that they are a very long way down the road to being a currency.

Although of course I never said thet are a currency. All of this nit-picking serves to distract from the main point.

What part of....

"Unit redeemable in payment for value supplied"

....is actually so difficult to understand for the average punter, do you think?

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

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 11:44:04 AM EST
[ Parent ]
ChrisCook:
Although of course I never said thet are a currency

...other than a 'proprietary currency' which you may argue is an oxymoron, and I would not disagree.

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

by ChrisCook (cojockathotmaildotcom) on Sun Jan 3rd, 2010 at 11:52:23 AM EST
[ Parent ]
use deficit-based fiat currency as a pricing denominator

Is that what you call present-value accounting these days?

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

by Migeru (migeru at eurotrib dot com) on Fri Jan 8th, 2010 at 06:04:10 AM EST
[ Parent ]
The front-cost of capital makes wind and natural gas plants two different worlds, where it is very difficult to compare which one is better from a cost-benefit perspective...

It all depends on the discount factor. Low interest rates as we have now would seem to reduce the advantage of gas over over nuclear or wind.

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

by Migeru (migeru at eurotrib dot com) on Fri Jan 8th, 2010 at 06:06:25 AM EST
[ Parent ]
And on the volatility. And on the expected future volatility.

In all relevant commodities and services, including whatever refinancing may be needed...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jan 8th, 2010 at 01:22:20 PM EST
[ Parent ]


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