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(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 ]

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