Sark Green Deal – Power to the People

The Sark Green Deal is an action plan or manifesto to mobilise Sark resources and people to a common purpose of energy independence for Sark. The aim is to continuously reduce cost and carbon intensity of Sark’s energy in all its forms, commencing with Sark electricity, and the means is through genuine partnership between Sark’s energy consumers, investors and managers.

Energy Independence 
Sark electricity is not the only expensive form of energy on Sark: fuels such as propane, heating oil & diesel used for heat and power are also extremely expensive and carbon intensive. During several visits to Sark, I found almost complete support for Sark energy independence. Once the electricity dispute has been resolved, it will therefore make sense for all Sark’s energy services (electricity, heat, power and so on) to be provided by a single Sark Energy utility. 

Smart Energy

Following the 1973 Oil Shock, when the oil price rose by 400% from $3 to $12 per barrel, Denmark (with an economy > 90% reliant on oil) faced an existential threat and implemented a new bipartisan energy strategy in order to achieve energy resilience, security and independence.

The organising principle of Denmark’s energy strategy was that for any given use of energy as a service,  Danes would minimise consumption of fossil fuels. Denmark therefore invested massively in renewable energy such as wind, in heat & power infrastructure; a switch in mobility to cycling and efficient public transport; investment in buildings and so on.

So Danes put energy cost before financial cost and the outcome, strikingly illustrated below was to transform a centralised Danish national grid to a localised Danish natural grid

The great Scottish inventor, James Watt, did not sell his new and much more efficient steam pump to Cornish tin mine-owners in 1778 but instead supplied the use of the pump in exchange for a third of the coal that was saved. Watt continuously improved his pump’s reliability and efficiency through an energy partnership with mine-owners delivering pumping as a service.

Capital Partnership
A capital partnership is a production or revenue sharing agreement between users of investment (capital users) and investors (capital partners), with a trusted third party managing partner.. Shared accounting records are maintained by the operating partner, and no single class of member has dominant rights over another. Sark Energy will be incorporated as a Guernsey Limited Liability Partnership (LLP).

Prepay funding is complementary to the conventional company shares and secured debt which Sark’s unique legal system does not accommodate. Prepayment of energy at a discount offers consumers and investors an energy return on investment, while enabling energy suppliers like SEL to access working capital. 

So Sark Green Deal’s Energy Partnership legal design will use capital partnership to fund assets and energy prepay to finance operations. Online implementation and electronic record-keeping lead to the result of simple energy financial technology or Energy Fintech which serves people, not machine processors.

Action Plan
This Sark Green Deal manifesto envisages three phases: Resolution, Transition and Operation. Through the partnership approach it is self evidently unnecessary to own productive assets to share or control their use.

The first step is for Sark Energy Holdings Ltd and Sark Electricity Ltd as founder members to incorporate Sark Energy LLP. 

  • Control – Sark acquires nominal ownership of SEL from SEH. Surplus sharing between SEL (capital user) and SEH (capital partner) replaces the current asset lease agreement. 
  • Management – Guernsey Electricity (GE) has for many years provided informal technical and other assistance to SEL. A simple service level agreement as managing/operating partner may be negotiated and included in the LLP agreement. .
  • Working Capital – discounted consumer prepayment for electricity enables settlement of legacy debts (eg legal costs) and thereby finances compliance with the Energy Price Commissioner’s price control order at 53p /kWh.

So through Sark Energy LLP, assets and business may be re-integrated; power may be shared equitably between investors and professional managers, and new working and fixed capital may be introduced without diluting the interests of SEH shareholders. This purely legal and financial Resolution requires financial audit but no examination or due diligence in respect of the physical energy assets under dispute. This potentially enables rapid implementation, probably by 1st February 2020 at the latest.

Driving transition an agreed energy strategy will frame a rapid programme of investment in solar, wind, energy storage and smart grid updates. Meanwhile a detailed plan for decarbonising other modes of Sark energy use will be developed.

This investment programme will be funded by additional capital partners, including equipment suppliers, who will share in the value of increased production and/or energy efficiency savings. While the target date for transition will be two years, suppliers will be incentivised by the partnership structure to complete the transition earlier and below budget. 

During transition Sark Energy LLP membership may be extended to include energy users as a whole while a legal framework for long term custody of assets is developed. Meanwhile, diesel-powered generation will be drastically reduced from 24/7 operation as the high carbon/financial cost Sark grid is transformed into a low carbon/ financial cost Sark natural grid. 

Following the transition, low cost, long term funding may be raised from a public offering of prepaid energy to risk-averse investors, enabling capital partners to exit their investment if they see fit.

For Chief Pleas and Sark Electricity shareholders the Sark Green Deal aims to resolve the dispute in respect of legacy assets and enable control of this essential utility to pass to Sark through simple, equitable partnership finance and governance which shares risk, cost and power in all its forms.

For consumers, the Sark electricity price determined by the energy price commissioner of 53p/kWh will be applied throughout a  transition period of up to two years beginning as soon as possible, and will be followed by a continuing long term process of further Sark energy cost reduction.

For investors, whether in the transition or in the long term the Sark Green Deal assumes pessimistically that energy demand remains flat. However, to the extent that currently empty hotels and residential properties are reactivated and demand increases, then the return on investment will be higher.

Energising Scotland – Introducing the ECO

There is perhaps no more crucial or contentious subject in the debate about Scottish independence than the subject of Scotland’s currency. There is nothing new about this: as long ago as 1705, in the run up to the 1707 Act of Union, John Law – the remarkable Scottish adventurer, gambler and originator in France of the first modern Central Bank – published a proposal for a land-backed currency for Scotland Money and Trade Considered: With a Proposal for Supplying the Nation with Money

Few are aware of this, but only less than 3% of the UK money supply is £ credits issued by the Bank of England on behalf of the UK Treasury. Over two thirds of the £ credits which constitute the UK money supply was created privately by banks to back mortgage loans, so that the majority of UK bank deposits are based on UK land. This fact makes it difficult to separate a Scottish monetary and fiscal system from the UK without the permission of Westminster.

But in considering a Scottish monetary system, in addition to the value of land and buildings, there is also the value of goods and services, the value of machinery, technology and (increasingly) of knowledge, data, and other forms of intellectual value.

Above all, there is the value of energy, and this proposal to energise Scotland’s economy through the introduction of the Energy Credit Obligation (ECO) is based on the simple fact that while the value of land use is by definition locally acceptable, the value of the use of energy is global. In other words, energy knows no nationality and no borders.

The ECO will not compete with the existing UK system, but will be complementary to it, being implementable now with no change in UK law.

The Big Picture
There are two strategic trends driving the evolution of modern economies: increasing energy intensity & the evolution of smart markets.

The former Saudi oil minister Yamani observed that the Stone Age did not end because of lack of stones, and that the Oil Age will not end for lack of oil. Whereas 30 years ago one barrel of oil fuelled the production of over 35 barrels, now the ‘easy’ oil has been extracted, and a barrel of oil may now be needed to fuel the extraction of 5 barrels or even less.

So while energy intensity of oil & gas production has increased, the Energy Return on Energy Invested (EROEI) has declined to the extent that the oil price has reached a level at which it is increasingly unaffordable, affecting demand. Moreover, it is increasingly economic to substitute oil with renewable energy, and to reduce oil use through smart interventions in energy efficiency (the Fifth Fuel).

The outcome of this secular increase in energy intensity is that the global $ oil price is effectively capped. Why else would Saudi’s Aramco and Russia’s Rosneft be prepared to sell equity ownership? They would never do this if they expected oil prices would continue to rise.

The current energy market is a transactional commodity market where energy is produced, bought and sold to consumers by middlemen such as oil companies or the Big Six, with a view to investor profit. Finance capital typically takes the form of equity (shares in a joint stock company) or debt (bank credit based in turn on bank equity capital).

For two decades, we have seen direct instant ‘Peer to Peer’ connections increasingly bypassing middlemen who have adapted by changing their business model. There is a transition to services driven by a very simple economic rationale. While owning assets and taking market & credit risk ties up a lot of finance capital, to provide services requires only ‘smart’ intellectual capital – knowledge, know how & know who.

For service providers it makes commercial sense to share assets, costs & risk wherever possible and to compete only on quality of service. However, the fundamental structural problem with the emerging Sharing Economy (exemplified by Uber and AirBnB) is that landlords, banks and above all shareholders don’t share.

National Grid to Natural Grid
No-one consumes raw energy in physical commodity form such as oil and gas. What we actually use is “Energy-as-a-Service”- dynamic energy delivered over time, such as heat/cooling, power, mobility, electromagnetic radiation & light.

Following the 1973 Oil Shock, when the oil price rose by 400% from $3 to $12 per barrel, Denmark (with an economy > 90% reliant on oil) faced an existential threat and implemented a new bipartisan energy strategy in order to achieve energy resilience, security and independence.

The organising principle of Denmark’s resilience-focused energy strategy was that for any given use of energy as a service, the Danes would minimise consumption of oil as a commodity. Denmark therefore invested massively in renewable energy such as wind (creating a global leader, Vestas, founded on Scottish technology), in heat & power infrastructure (again building huge expertise and a technology base); a switch in mobility to cycling and efficient public transport; investment in buildings and so on. In other words the Danes put energy cost before financial cost.

The following image strikingly illustrates how this organising principle transformed Denmark’s energy infrastructure from a centralised National Grid, in 1990, to an emerging distributed Natural Grid in 2014.

What about the economic outcome? Surely this massive infrastructure investment – which broke all the conventional market rules – must have wrecked Denmark’s economy? In fact, while Denmark’s GDP has more than doubled since 1973, the Danes’ energy use declined and carbon fuel use declined significantly, which in turn – as an unintended consequence – reduced Denmark’s CO2 emissions.

So Denmark demonstrated in practice that to apply a strategic organising principle of least resource cost leads not only towards national resilience, energy security & independence but also to a transition to a low carbon economy. However: Scotland is not Denmark.

Denmark was able to achieve this transformation firstly because energy utilities were publicly owned, and secondly because Danish local government is not only more local than in Scotland but also was well resourced fiscally through land value taxation (but note this source has been diluted). Denmark was therefore able to deploy public capital, directly and indirectly (eg through guarantees of bank loans to Coops) to infrastructure which would not have been financially viable using private finance capital of debt and equity and the Nordic commodity market in energy which has since emerged..

Scotland has very different institutions to Denmark: our councils are regional, not local: our energy utilities are in private not public hands; and in any case, energy policy is reserved to Westminster. So Scotland needs innovative institutions and instruments to mobilise resources and moreover, it must be possible to implement these bottom up with little or no change in the law.

But how? Enter Financial Technology (Fintech).

Energy Fintech
The current wave of new data sharing/authenticating protocols between machines (Blockchains) and financial instruments (Coins such as Bitcoin) have emerged completely outside the existing economy and have created what is clearly a financial bubble, akin to the historic South Sea Bubble and the more recent Internet Bubble.

In the same way that modern online businesses emerged from the Internet bubble, we are now seeing Fintech evolve as this new digital layer is integrated with the real world economy, and nothing is more real than energy. This proposal to energise Scotland brings to bear innovative legal design of the institutions and instruments which – Back to the Future – pre-date the modern economy.

Energy Credit Obligation (ECO)
An ECO credit instrument is simply a promise issued by an energy producer in exchange for value received from an acceptor. An ECO holder has no right to demand payment in £ sterling, so it is not a debt instrument. There is no right to demand delivery of energy, so an ECO is not a derivative (forward/futures) instrument. The ECO confers no right of ownership such as a rent or dividend, so it is not an equity instrument. Finally, it is not purely an authenticated receipt or proof of value received or expended without any additional obligation – so it is not a Fintech Coin instrument like Bitcoin.

The obligation of a supplier of energy services who issues an ECO is simply to accept this instrument in payment for his energy supply So if a customer presents an ECO instead of (say) £ sterling this will be valid payment for energy supply and an authenticated ECO cannot be repudiated, and £ sterling claimed instead..

There is nothing new about promises as a means of payment: this instrument pre-dates all others and has been routinely in use for millennia wherever people trust each other. Promises/credits form the unseen foundation of all economies even today.

Historically, governments and banks have been the institutions which acted as intermediary organisations to provide the trust which is necessary for the creation, exchange and fulfilment of promises. This reality is embedded in the English language so that Tax Return refers to the return and cancellation of sovereign tax credits; Rate of Return to the rate at which promises may be returned to the promissor, and Stock refers to the split tally stick wooden tokens which recorded promises.

The question is what are the future Scottish risk, cost and surplus sharing institutions which will provide a framework of trust for the ECO.

Local Energy Companies
A Local Energy Company is not an organisation – there are enough of these already – it’s simply an agreement between existing local stakeholders to create new energy infrastructure.- a local Natural Grid. The aim of an LEC is energy independence (and hence, energy security and resilience) for a locality.

As with all pre-1855 Companies – particularly those incorporated to build civic infrastructure – these Companies would not have limited liability the reason because with all stakeholders as members there is simply no need to limit liability. Neither would the Company have share capital, because any necessary investment is raised by selling energy credit obligations (ECO) to investors to create energy loans.

There are three stakeholder associations/clubs: energy users & producers (who use the energy infrastructure); energy investors; energy service providers (developer/managers). In addition there will be custodian members. Energy service users and investors delegate development & management, while retaining veto rights of governance. The ultimate veto, is held by custodians in the public interest so that infrastructure is held in common in perpetuity. In this participative governance model, no stakeholder has dominant rights to impose his will on others and for that reason I call such an agreement a Nondominium.

The LEC agreement shares costs and surplus, particularly from development of new assets. It also shares risk through a mutual guarantee with shared (Fintech) accounting/clearing of acceptances by one supplier of ECOs issued by another. There is nothing new about such associative agreements: Scottish farmers innovated machinery rings and now compete on quality but collaborate on costs. Ship-owners have clubbed together globally for over 140 years in Protection & Indemnity (P&I) Clubs to cover risks that the insurance middlemen of Lloyds of London will not take. And so on.

What is the role of banks in such an energy market system? Since banks are not energy suppliers they cannot issue ECOs, but there are two important financial services which banks can provide: firstly, as risk managers overseeing ECO issuance and clearing and secondly, in advising and bringing ECO energy investors together with ECO energy loan investments, both for new and completed assets..

Local Energy Companies may be networked through membership of Energy Companies covering a greater locality: so by way of example the Linlithgow Energy Company would simply be a member of the West Lothian Energy Company and so on. LECs may be founded and incorporated at any time, and are complementary to the existing fragmented and commoditised energy market.

ECO energy credits are independent of location; implementable bottom up, rather than top down; have no nationality; and lead directly to energy independence and an energy economy. Scottish economic decisions made on the basis of least resource cost rather than least £ cost will lead to the creation of a Scottish Natural Grid. As energy services markets spread by local implementation, it leads to a broader international Natural Grid as the energy market evolves from a transactional commodity market.

However, while focusing exclusively on objective energy cost may be the dream of technocrats, it leads to nightmares for everyone else. So while score should be kept of finite physical resources in objective energy terms, the minimisation of human cost and the maximisation of happiness, beauty, care and amenity requires subjective measures.

So we shall also need new Scottish institutions and instruments to mobilise relationships between Scots, and between Scots and the land in which we live: that is another story, of Scottish housing, food, care and health services and independence.