Heat Partnerships

A Green Deal that might actually work

Chris Cook

I.M.E., London, 29th August 2012

SolutionsCapital Partnership ('Nondominium')

Neutral framework agreement for sharing of risk and reward

Capital Partnership does not own anything, employ anyone, or contract with anyone but its members do

Agnostic as to legal form (eg Limited Liability Partnership; Company Limited by Guarantee)

Prepay ('Stock') Undated credit instrument returnable in exchange for

value Created, issued, exchanged and returned within Capital

Partnership framework agreement

Capital Partnership

CustodianCustodian

Investors

Consumers

Managers

Capital Partnership Custodian

Custody of data and accounts Mutual Guarantee

Energy Consumers – exchange value for the use of energy

Energy Managers Operate system, manage risk, provide quality control

Energy Investors Buy Units of stock returnable in exchange for energy Custodian issues energy stock on instruction of

Managers Managers supervise issue, exchange & return

Prepay 1.0 - 'Stock'Stock

Original form of 'equity' – not shares in Joint Stock Company

Prepay/credit instrument issued at a discount to market price

Returnable in payment for energy supplied Prepayment for supply Undated

Return Discount gives absolute return: eg $10's worth of gas

for $8 now Rate of Return is variable – literally the rate over time

at which stock may be returned to the issuer or sold No interest (money for the use of money)

Prepay 2.0 – Stock reinventedIn the late 1990's Enron began to use PrepayCommodities sold at a discount for dollars &

delivered laterExample: oil market price $100: 1m barrels sold

for $90 now and delivery in 6 monthsEnron used Prepay to defraud creditors and

investorsSince 2005 investment banks and producers have

used prepay to defraud the oil market

Green Deal - Issues Problem

Compound interest - bank rates of interest mean many

projects are not viable Behaviour (Jevon's Paradox) – even if £ is saved there is no guarantee that energy will be saved

SolutionDirect 'peer to asset' investment in energyReturn on energy investment but no compound interest – money paid for the use of energy Unless Exergy is saved £ will not be saved – saving Exergy is saving money

Green Deal 2.0 - Heat Pool and Heat Loans Investors buy Mmbtu units of Heat Stock at a

discount to the market priceDiscount generates a return to energy investors NB - $ billions now invested in energy even

without a returnHeat Pool energy fund is thereby created in £Heat Pool fund invests £ in heat production and

heat saving projects through 'heat loans' denominated in Mmbtu

Projects buy back units of heat stock at the market price through utility bill

How it Works

CustodianCustodianStock Investors

Consumers

Proportional SharesManagers, Producers

energy $ or Stock Returned

$

Stock

Stock

Stock

Hyde Farm Energy Partnership

CustodianLambeth Council

CustodianLambeth Council

Investors(Association)

Consumers(Association)

Managers(Consortium)

Hyde Farm Partnership – Financing PhaseShort term, medium/high risk investmentCapital Partnership framework uses transitional

LLP vehicle and a mix of grant, debt and partnership equity investment

City of Glasgow currently has five municipal LLPsDebt repaid, grants recyclable, and equity

investors exit to Funding Phase Investors

Hyde Farm Partnership – Funding PhaseLong term, low risk direct investment in energyCapital Partnership framework uses Company

Limited by Guarantee framework and energy stock investment

Optimal form of investment in terms of risk profile, liquidity and sheer simplicity

Optimal form of funding in terms of cost

Danish Policy – Energy Economics

Energy Investment Danish policy after 1973 oil shock exposed energy

insecurity Identify desired outcome eg heat, electricity, transport Identify solution with least carbon fuel input ie what happens in the system for each KwH of

electricity or Mmbtu of heat produced? Energy return against energy invested – least energy

cost solution Participants obliged to comply with policy against their

financial interests

Synergetic Economic BehaviourEnergy middlemen transition to energy service

provisionMinimises need for finance capital – replaced by

human capitalLeast energy cost, rather than least £ costMarket tends to stability Common interest in minimising energy useFinancing and funding costs minimised since no

payment is made to rent-seekers'Big Trade' of the 21st Century

Value of intellect (IP; skills) exchanged for value of carbon

energy saved (ie optimisation of Exergy)