Bursting the Bubble of Carbon Finance

The idea of a carbon bubble first came to my attention when I was researching a submission to the Environmental Audit Committee's Inquiry into Green Finance on behalf of the Green House thinktank. Anmongst other questions they asked:

'How effective are the financial markets in matching available finance to the required investment in renewable energy and other green projects? To what extent is a potential “carbon bubble” a real risk?'

They referred those providing evidence to a page from the seemingly well funded Carbon Tracker project which seeks to quantify the over-valuation of what they refer to as 'stranded assets'. The project seeks to put a value on the carbon-related assets that cannot be realised if we seriously address the issue of climate change. Once we introduce rigorous carbon limits the fuel their value relies on becomes unburnable and therefore the value is lost. Carbon Tracker reports frighteningly large numbers of potentially stranded assets: they take a value of $4trillion in 2012 that is used servicing $1.27trillion in outstanding corporate debt.

The frightening way of framing of this discussion is that once the over-valuation is recognised it could precipitats another collapse in financial markets and another financial crisis. This always seemed to me hugely naive suggesting that the rich and powerful who control these assets would permit political decisions on climate change to destroy their value. It was in this vein that I responded to the EAC inquiry:

 

'The idea of a "carbon bubble" assumes that legislation passed in the wake of concern about climate change to limit carbon dioxide emissions is more powerful than the political influence of fossil-fuel companies. While we would like to believe that this is the case we suggest that it is a rather naive position. Is it not more likely that, if energy companies find themselves with quantities of fuel that cannot be burned within existing carbon limits, they lobby to have those limits changed rather than allowing their investments to be diminished? We suggest that the EAC is in a strong position to generate evidence on this to prepare for such lobbying.'

Then I simply forgot about the debate. What brought it to my attention again was the machinations of self publicist MP Jacob Rees-Mogg and the internal Tory party debates about green crap and green levies. As I blogged earlier, it seems fairly apparent that the concern of Tory grandees is for their own assets and not shivering pensioners. Here we see the playing out of the political end-game of climate change. The post-fossil world is one of community-owned energy and economic liberation, so there is no surprise that climate change is a battle based in political economy rather than science.

The discussion about the carbon bubble issue has become a dialogue of the deaf between holders of carbon-related assets and those who are fearful about The Financial Crisis round II. How refreshing it was, therefore, to be at the Compass Youth meeting on this issue at Portcullis House last week. Although the meeting itself was advertised in a fairly scary way, through debating the issue we discovered that in reality we may not be facing a catastrophic economic collapse but an orderly transition to a post-fossil future matched by a gradual reduction in the value of carbon-related assets.

In a strange way it is even encouraging that Bloomberg recently launched their carbon risk valuation tool. Investors and those who serve them seem unconvinced by the Tories' dinosaur protection plans and appear to see the wind is blowing in the direction of renewables. And we can all play our part here by encouraging those who hold our assets, whether our pension funds, universities, or local authorities, to divest from carbon assets just as they have or should have divested from assets relating to tobacco, alcohol and arms.

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The Wind is Ours

I was very pleased to be present at the August meeting of Stroud District Council's development control committee where we had an important item to discuss: planning permission for two wind turbines in the southern part of our district. The proposal came from the Resilience Centre, a renewable energy company based in the Forest of Dean. They had previously applied for planning permission for the turbines but permission had been rejected. This time, however, they had the support of the planning officers and were hopeful that permission would be granted.

As ever with such applications there was considerable local resistance from the community living close to the proposed site and the ward councillor for Hardwick also spoke against the application. Representatives from the Resilience Centre and from the community of Kingswood both spoke and the debate was well-informed, respectful and inclusive. Although the final vote will split it was in favour of permission being given and the key deciding factor was the fact that a large dividend will be paid to the community and local people will be offered the opportunity to buy shares in the wind turbines. So everybody in the community affected in Kingswood will benefit and in addition a local investment vehicle will be created.

On Saturday I saw plans for a much larger and more ambitious proposal to build a large array of wind turbines off the south coast of England close to Bournemouth and Poole known as Navitus Bay. In many ways this proposal could not be more different from that which had been agreed at the planning meeting. It has aroused huge local opposition much of which, like the opposition in Stroud, is apparently the result of the potential impact on the landscape. In the case of Bournemouth, this is interpreted as an economic objection rather than a social one, since the argument is that tourists will be put off by the 'towering' turbines.

However it seems to me that the real objection is much work closely connected with ownership than it is with the appearance of the windfarm. The Navitus Bay wind array is being proposed by a consortium between EDF energy's renewable subsidiary and the Dutch-owned Eneco Wind. This appears to be a bizarre reversal of our colonial past where we exploited the energy resources of other countries, originally of course those of Wales to fuel the industrial revolution that made Britain the economic driving force of global capitalism. But now, with a desperately unimaginative government and an economy focused on finance rather than the productive sectors, we seem incapable even of using our own energy resources in the national interest.

This is such a striking contrast with the situation in other EU countries, famously Denmark and Germany, where government is creating a framework for communities to emancipates themselves from energy corporations and have take genuine ownership over there in renewable energy resources.  Because of the focus on community and publicly owned renewables Denmark is the European leader in renewable generation and also consequently turbine manufacture.During the 1980s the Danish government funded 30% of all investments in wind turbines with the result that by 2009, 28% of Denmark’s electricity came from renewable sources.  While the economy has grown by 78% between 1980 and 2009 energy consumption has not increased, indicating significant advances in energy efficiency.

In the period of initial expansion some 80% of turbines were owned by families or co-operatives and 28% of Denmark’s energy coming from renewable energy. This has also led to impressive regeneration with the country now manufacturing half the world’s turbines, with the parallel creation of 20,000 jobs (all data from Andy Cumbers's excellent book Reclaiming Public Ownership. As document by the excellent Energiewende website, the transition away from fossil fuels and nuclear in Germany is even more impressive in its speed and again it is being driven by social ownership. The graphic shows that, in stark contrast to developments in Bournemouth, around half of German generating capacity is now owned by private individuals.

Germany is providing an inspiring example of the speed with which the transition to a renewable energy future is possible. These developments are in the possible because of the genuine engagement of local communities and their ability to take real rather than metaphorical ownership of their energy resources. What a sad contrast to the situation in the UK, with an emphasis on fracking and nuclear new-build to increase our dependence on yesterday's energy sources and to generate privatised profits for the few rather than energy liberation for the many.

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Ecodynamism Alive and Well in Stroud

A change of focus away from the world of global financial exploitation and towards local investment to develop resilience and build the green economy in our communities. A new renewable energy co-operative was born in Stroud on 25 January, when Ecodynamic's founding Community Share Offer was launched, appropriately enough in our local micro-brewery Stroud Brewery.

Ecodynamic has been founded in association with the Biodynamic Land Trust, as an anchor investor, to reinvest surpluses from renewable energy into sustainable food projects. Ecodynamic is seeking to raise £350,000 by 22nd March to purchase and run a new 55KW Endurance wind turbine in Cornwall. Shares have a projected annual return of 3% rising to 5% after year three over the 20 year life of the project. Greg Pilley said at the launch, ‘I will invest £1,000 in Ecodynamic to keep the local community investment revolution fermenting for renewable energy generation.’

Ecodynamic is applying to HRMC for EIS relief, which if successful, will allow UK tax payers to get 30% tax relief in year one, so a £1000 investment will attract £300 tax relief, if EIS is approved. As a mutual organisation, all members will have equal votes in how the society is run and what projects will be supported.

Founding Ecodynamic director Martin Large, (who set up Fordhall Farm’s pioneering charitable co-op structure in 2005-6, and who is a director of Stroud Common Wealth) says that, ‘Ecodynamic offers the attractive combination of both getting interest on your investment in a community energy project, which is backed financially by the government’s Feed in Tariff , and also reinvesting any surplus into viable food and energy projects.’

Ecodynamic directors are experienced in business, co-ops, renewable energy, farming, banking and finance. Ecodynamic respects co-op principles and has a vision to create a ‘co-operative turn’ towards a sustainable social economy, just like the West Mill Co-op. James Mansfield, also a Director, said ‘I see Ecodynamic as having tremendous potential to contribute to our society’s present and future wellbeing, by reinvesting surpluses from renewable energy projects into sustainable, biodynamic and organic food production.’

If you have some money to invest and you would like to see it used to build resilience into our local economies you know where to go.

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Bristol Green Deal

The election of an independent  mayor in Bristol offers opportunities for truly creative policy-making. In this guest post Chris Cook, a former market regulator in futures and petroleum markets and now senior research fellow at UCL, suggests a novel financing mechanism for funding a rapid expansion of Bristol’s renewable infrastructure as one step on the road to what he calls a ‘natural grid’.

One of the key objectives of any 21^st century political administration – and Bristol is no different - is how to achieve energy independence and energy security by becoming as self sufficient in energy as possible. Energy independence for Bristol can be achieved in two ways: firstly by investment in Bristol renewable energy, and secondly, by massive investment in energy efficiency.  21^st Century problems cannot be solved with 20^th century solutions, but the irony is that the radical funding solutions leading to energy independence may be found prior to the advent of modern banking in1694.

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 the mayor's administration might fund itself by issuing prepaid rates 'stock' at a discount in this way is a fascinating one, it happens to be illegal, and this proposal is rather more pragmatic, being achievable immediately, with no change in any law.

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 UK renewable energy are hoovered out of the UK. 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 – or a Bristol Green Deal.

The Gas Pool

The Gas Pool will be a fund, administered by an ethical and competent provider of financial services such as Triodos Bank. 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 the value of natural gas. However, in addition to only being able to sell units conventionally (or unconventionally)  to other investors they will also 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% 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 Bristol 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 Bristol Green Deal could be introduced tomorrow.

A Natural Grid

But of course, investment in homes addresses only part of the problem.  The UK needs a least energy cost 'Natural Grid' which is complementary to the 'least £ cost' National Grid currently festooning the country's 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 in Bristol – such as a network of community level modular Combined Heat & Power installations- may be funded using similar techniques. But exactly how that works would be - like resolution of unsustainable Bristol property debt using similar investment techniques – for another radical Bristol policy story.

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Answers Still Blowing in the Wind

Technical reports about wind-power present a classic picture of statisticians dealing with the unpredictable. Aside from a helpful opening sentence in a BERR advisory note informing us that 'The UK is a very windy country' and a range of pseudotechnical concepts, it is hard to get accurate figures about how much of our electricity could realistically be generated from windpower. But what is fairly clear is that we have a lot of wind 'resource' availabile and, because we have a large Atlantic coast, the wind blows relatively more consistently here than in Denmark and Germany, which both have considerably more installed capacity than we do (Germany has 16.2% of the global total compared to our 2.6%).

This year's annual Ethical Consumerism Report indicates that spending on most areas of fair trade and ethical goods shows large increases (organic food is the exception), but the report's funders Co-operative Financial Services identify renewable energy an example of area that has 'failed to make significant progress'. So what is holding us back, and what can be done to break through these barriers?

Assuming that we are not going to have a government that will see this as an opportunity to create jobs and reduce our carbon impact and thus provide state investment to the sector, we will have to rely on a combination of good will and financial incentives. So in order for this market to take off we need what a technologically constipated economist might refer to as a 'triple coincidence of incentives'. We need the right sort of wind (fairly consistent and not gusty), where people consume large amounts of electricity and where there is spare capital for them to invest in the hardware.

In an earlier post I argued that the main hurdle to be overcome - the resistance of local communities to 'unsightly' windfarms in their vecinity - could best be addressed by a co-operative model but it seems that, even with the generous terms currently available via the feed-in tariff, we still do not have the right model to garner sufficient support to see the response from local communities that would enable us to match Germany's capacity over the next five years or so.

One disincentive for local communities is that cost of the environmental reports needed to get a planning application on its way, when the possibilities of success are still unknown. This might amount to £40,000 or so that must be found from local small investors, who may just be throwing their money away. What we need is a group of Public Interest Planners who can afford to do this work pro bono and, where this is relevant, provide templates for the parts of the reports that are not site-specific. A Community Renewable Energy Toolkit for England and Wales, along the lines of that already produced by the Scottish government, could also help the process.

But rather than knowledge or expertise it may be the financial engineering that is most necessary. On this front, I heard an interesting pitch recently from Tim Helweg-Larsen, formerly of the Global Commons Institute and now at the Public Interest Research Centre. His model, called the Energy Bank, connects well-intentioned investors with local communities in windy places, at least achieving a double coincidence. Whether this turns out to be more successful than the payments offered to smooth the path to planning permission in reluctant communities remains to be seen.
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