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A Scottish Green Deal

by ChrisCook Fri Dec 7th, 2012 at 07:03:32 AM EST

I still check in here occasionally, but as Migeru recently reminded me, I haven't posted here for a while.

Not that I've been idle. I've been spending quite a bit of time as a Senior Research Fellow at UCL working on reality-based and pragmatic policies aimed at facilitating resilient markets and a resilient society.

Also internationally, where I am advising a group of ten nations in respect of strategic energy policy generally, and a Transition through Gas specifically.

The following post was written - at the invitation of the Yes Campaign - as a consequence of a recent 'Radical Independence' event in Glasgow which brought together Scottish Nationalists and the Left. As the Green MSP, Patrick Harvie, put it re Radical Independence,there is no other kind of Independence, since if you want the status quo, why vote for Independence?

Anyway, the following policy proposal aimed at achieving energy independence suggests a simple but radical way - implementable with no change in any law - of funding energy efficiency generally, and Danish-style community heat initiatives in particular.

The model will work in any jurisdiction: all that changes is the legal vehicles necessary.

A Scottish Green Deal

The fact that the Green Investment Bank has now opened for business in Scotland but will not be receiving borrowing powers from Westminster until 2015, if then, is a conclusive example of the need for new policies for radical independence generally and energy independence in particular.

Energy independence for Scotland can be achieved in two ways: firstly by exploiting Scottish renewable energy, and secondly, by massive investment in energy efficiency.  

21st Century problems cannot be solved with 20th century solutions, but the irony is that the radical funding solutions leading to energy independence may be found prior to the Act of Union in 1707.

Prepay 1.0
It has been long forgotten, but for many hundreds of years British sovereigns financed their expenditure though issuing undated IOUs - at a discount enabling a profit - to creditors who provided value in exchange. These IOUs were returnable in payment for taxes and that part of the wooden 'tally stick' record issued to a creditor as a token of the IOU was known as the 'stock'.

Interestingly, the phrase 'rate of return' describes the rate at which the creditor could generate his profit by returning his IOU/stock to the Exchequer for cancellation.  The more tax he was due to pay, the quicker was the rate of return of the stock.

Now, while the idea that a future Scottish government might fund itself by issuing prepaid tax 'stock' at a discount in this way is a fascinating one, this proposal is rather more pragmatic, being achievable immediately, rather than after independence.

Prepay 2.0
Both renewable energy and energy efficiency are free.  Clearly, if renewable energy or energy savings can be packaged and sold to investors at the right price, then necessary capital investment can be funded. But there are several problems with conventional sterling (£) funding of renewable energy.

Firstly, compound interest on bank borrowings: a debt doubles in 10 years at 7% compound interest.  Secondly, electricity is sold at a low price to a wholesaler, who makes as much profit as the regulator permits when selling to retail customers. Thirdly, the high rates of return demanded by investors in respect of shares in Victorian vintage 'Joint Stock' Limited Liability Companies.  

Then, to add insult to injury, because most renewable energy development is by foreign owned companies, most of these fat profits from Scottish renewable energy are hoovered out of Scotland.

So, let's put renewable energy investment to one side for the moment and look at the low hanging fruit: massive investment in energy efficiency - ie a Scottish Green Deal.

The Gas Pool
The Gas Pool will be a fund, administered by a service provider like the Green Investment Bank.

Firstly, the proposition for Investors is that they may buy units in the Pool, and that these units will be denominated, like their gas bill, in Mmbtu's of heat energy.  So investors may invest directly in  natural gas. However, rather than only being able to sell units conventionally (or unconventionally)  to other investors they will have the 'stock' choice of returning their units in payment for gas bills.

Note here that in the US there are billions of dollars invested in natural gas and other energy funds by investors who observe zero per cent interest on Treasury Bill investment, while the Federal Reserve Bank prints new dollars massively.  These risk averse 'inflation hedger' investors do not seek a return on their capital: they simply seek a return of their capital.

Gas Loans
The Gas Pool will invest - alongside the existing Green Deal and complementary to it - in 'micro' level energy saving investments in homes and the resulting 'Gas Loans' will be repaid as occupiers buy back units in the Gas Pool at the gas market £ price via their gas bill.

The conventional bank debt funded Green Deal suffers from two flaws: firstly, compound interest at perhaps 7%, and secondly, the behavioural problem that even though people may save £ there is no guarantee they will save energy.

However, with Gas Loans, there is firstly no compound interest, since the return to investors is in the energy value of gas, and secondly unless occupiers use less energy then they will not save £.

With the right legal and financial structure, such a Scottish Green Deal could be introduced tomorrow.

A Natural Grid
But of course, investment in homes addresses only part of the problem.  Scotland needs a least energy cost 'Natural Grid' which is complementary to the 'least £ cost' National Grid currently festooning Scottish beauty spots with pylons.

Denmark leads the way here, both with retrofitting 'macro' infrastructure (eg Copenhagen's 150km hot water grid) and with massive 'bottom up' investment in community level heat infrastructure, such as combined heat and power, and heat storage.

Such macro and 'meso' level investment may be funded using similar techniques: but exactly how that works is another Radical Independence story.

I get the investment side - the times are so crappy that putting your money into something that is likely to retain value is an excellent proposition. So they collect money form investors. The next part is a bit more convoluted to me.

European Tribune - A Scottish Green Deal

The Gas Pool will invest - alongside the existing Green Deal and complementary to it - in 'micro' level energy saving investments in homes and the resulting 'Gas Loans' will be repaid as occupiers buy back units in the Gas Pool at the gas market £ price via their gas bill.

So I the houseowner borrow X amount of money from the pool, and put in some isolation. I pay it back by paying for more gas hours then I consume for some time (right?) and hopefully gets a total bill that has fewer gas hours then before even with the payback.

But what does the Gas Pool get? They decrease tehir market but save gas hours, so is that their objective, to save gas hours for the future?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Dec 7th, 2012 at 02:34:53 PM EST
Investors in natural gas are 'prepaying' for natural gas by buying units returnable in payment for it.

The investors are exposed to the price of natural gas, which they do because they take the view that natural gas will hold its value - or increase in value - by reference to £.

ie they are 'hedging energy price inflation'.

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

by ChrisCook (cojockathotmaildotcom) on Fri Dec 7th, 2012 at 05:39:20 PM EST
[ Parent ]
For the recipients of the 'gas loans' the proposition is that they improve the energy efficiency of their homes; or obtain a cheap source of hot water (via a hot water grid ) and so on.

They see their gas bill reduced, and part of the savings in natural gas are dedicated to buying back natural gas units in the pool.

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

by ChrisCook (cojockathotmaildotcom) on Fri Dec 7th, 2012 at 05:44:02 PM EST
[ Parent ]
So, house owner could invest, say, three to five years worth of the present annual value of gas purchases for his apartment building and then borrow back a substantial portion or, perhaps, more than was invested to upgrade the thermal efficiency of the building. This might make sense for many home owners, depending on their cash flow situation, as they are trying to save for retirement already.

He would then pay off this loan by simply by paying his monthly gas bill until the loan is repaid? This would assume that he is renting the apartments with the cost of gas included as a pass-through, though this could extend to electricity and water as well.
Except a borrower might not be required to invest any or all the cost of the loan, so that some might only invest as a means of hedging against possible future price increases in gas and others might only borrow?

I can see that, by pre-purchasing the amount of the gas and then borrowing back enough to significantly upgrade the insulation, that then there would be gas credits left over after paying for the gas for the time estimated. But they do have to both pay for the gas consumed and also repay the loan, either in £ or unused gas credits, do they not? I would also assume that there would be some equivalent of interest on the loan, though it need not be what credit card providers like to charge.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 8th, 2012 at 04:46:50 AM EST
The current UK 'Green Deal' is loosely based upon the US programme I first wrote about here in ET in November 2007 and subsequently in November 2008 and then in July 2009.

These programmes concerned borrowing from local municipalities in dollars at low interest rates to install renewable energy, particularly Solar PV.

The key point is that the loan is to the property, not the owner, and is collected through the property assessment of local taxes.

In the UK's Green Deal - which finances energy efficiency measures, rather than renewables - we see the loans are again repaid by the occupier, rather than the owner.

The only difference with the Scottish Green Deal is that the loan is essentially denominated - but not repaid - in energy, rather than £.

In the Scottish Green Deal model, the occupier will borrow (say) £12,000 to install insulation, and participate in a community CHP initiative (Heat Grid).

At the time of the Gas Loan the Gas price is (say) £6.00 per MMbtu and he therefore has a Gas Loan of 2,000 MMbtu to repay.

He now uses gas only for cooking, since his heating and hot water, and also a proportion of his electricity, comes from the Community CHP grid whose gas fuel costs he shares as a member. (electricity can also be priced in the energy value of gas or vice versa).

Let's say his gas use has fallen from 300 MMbtu per year to 100 MMbtu per year.

He will be billed for his reduced gas use in the normal way, and the Gas Loan will then be repaid through the payment to the utility of an additional amount in respect of Units in the Pool.

Let's say this was a 20 year gas loan, in which case the occupier would buy an additional 100 MMbtu of gas units each year in order to repay the loan.

But of course, most rational borrowers would aim to repay the heat loan as soon as possible, and would therefore do so at the rate of 200 MMbtu per year ie over 10 years.

Note that it remains in their interests to save even more gas and repay the gas loan even quicker.

Re interest, the investor in the Gas Pool may bid for Units at below the current gas market price, and any discount achieved will literally give him a return, when his units are repurchased at the gas market price by borrowers repayments.

The faster the borrowers repay the gas loan, the greater the 'rate of return' of the investor.


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

by ChrisCook (cojockathotmaildotcom) on Sat Dec 8th, 2012 at 06:50:53 AM EST
[ Parent ]
There is no money for the use of money (compound interest) in the SGD model, but there may be a return to the investor in gas, which is essentially money paid by the borrower for the use of the (energy) value of natural gas.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sat Dec 8th, 2012 at 07:14:02 AM EST
[ Parent ]
Hopefully, at some point soon, people who promote forward investment in fossil-fuels will get recognised as climate criminals, and treated as such.
by LondonAnalytics (Andrew Smith) on Wed Dec 12th, 2012 at 07:51:52 AM EST
That's a perfectly valid view, and if accepted, should be applied to the Saudis who have opaquely been doing just that.

I, on the other hand, advocate forward investment in fossil fuel savings, and I do so in a way which wipes the floor with conventional deficit-based financing, and techniques such as emissions trading and carbon credits denominated in deficit-based currency which work in theory but not in practice.

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

by ChrisCook (cojockathotmaildotcom) on Wed Dec 12th, 2012 at 01:16:25 PM EST
[ Parent ]

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