Societies become wealthier when wealth is more evenly distributed. Wealth disparity occurs because the distribution of new Capital is inefficient. People with wealth use it to acquire more than they need and unnecessarily take wealth from others. We see it across all nations where those with wealth extract wealth using social tactics or force.
We use wealth to create more wealth. The best way for all to prosper and face existential threats to group survival is to provide everyone with wealth to invest to reduce the demands on the planet.
A simple way to distribute wealth across a population is to share new Capital created from profitable investments with buyers. We do that by leaving the profits and existing Capital with investors, giving buyers the new Capital making buyers new investors. When buyers are investors, they get a say in how a business chooses to invest. Buyer investors get more wealth by reducing the cost of products; when investors are not buyers, they get more wealth by increasing the cost of products.
When we distribute Capital using buyer automatic acquisition, an interesting thing happens. The price of goods and services drops from the removal of rentier profits of interest, capital gains, and dividends. More importantly, investors stop accumulating unnecessary capital as the new Capital goes to buyers who have to invest their new Capital. Community Capital moves twice as fast as Equity Capital and hence is more efficient as we need less Capital.
It is low-cost to change from inefficient Equity Capital to more efficient Community Capital. The cost is low because the changes are to financial rules to permit Community Capital. There is no change to the rules of Equity Capital nor the products or means of production.
The following describes Community Capital with the above characteristics. It illustrates a real-world example of funding Community Batteries which today are uneconomic with Equity Capital but are with Community Capital.
Community Capital
Community Capital is Capital where a local community collectively owns assets. Individuals can have custody of particular assets — such as a house or car. When the assets produce a saleable product, the sale is to another community member. The member buys the product and also receives the Capital value embedded in the product price. It is new Capital, but the Community invests the money. Members can also invest money directly — if the Community has assets it wishes to purchase or build.
All members receive the same return on their investment as a discount on products purchased from the assets funded with Community Capital. However, investors may not wish or be able to buy products, so they receive a monthly payment from the purchase of products by another member who accumulates Community Capital.
Community Capital compared to Equity or Loan Capital.
Here
- Efficient means the lowest cost for the same amount of Capital invested over a fixed time.
- The Marginal Cost is often called the running cost and is the cost of producing one more unit. It could be the cost of one more kWh.
- The Capital Cost is the total cost minus the Marginal cost.
- The Capital Cost includes the cost of existing Capital plus the profit.
- Existing Capital still exists in the business after a sale.
- Profit minus the return on investment is new Capital.
When a person buys goods and services, they exchange money for goods and services. They pay for the marginal cost of goods and services plus the cost of Capital and New Capital. With Equity Capital, they receive the goods or services but do not receive any of the Capital or New Capital. That all goes to the owners of the business. The buyer pays for Capital but does not receive anything for it, and the owner keeps the Capital and sells it again. The exchange is unbalanced and reduces the Capital deployment rate.
The current practice is for investors to retain the existing and new Capital. With Community Capital, the investors receive the profits and the new Capital. But they also transfer the old Capital of equal value to the new Capital to the buyers.
From the point of view of a community, Community Capital is at least twice as efficient as Equity Capital because
- With equity, the extra Capital does not move and stagnates until the investor decides to sell it.
- Selling Capital is expensive, and removing it increases the value of Community Capital.
- It removes some of the cost of government assistance for those in a Community without Capital.
- Profits come from reducing costs rather than selling more.
- Equity Investing removes Capital from a community as dividends, interest or Capital gains and that Capital is no longer available to the community from which it came.
In summary, Equity Capital is extractive and owners of equity exhibit rentier behaviour if they accumulate profits rather than invest them. In contrast, Community Capital is regenerative and circular. Profits come from reducing costs and economies of scale, but Community Capital has a negative feedback loop that recognises when economies of scale no longer apply. Another cost reduction of Community Capital is the movement of Capital from investors to buyers at the moment of sale.
Community Battery Example
Community-owned batteries are economic if the Australian Energy Regulator (AER) agrees that power generated by local solar is consumed locally and if the battery can operate in the wholesale electricity market. The decision by the AER does not affect the operation of the grid — only the flows of money.
The costs paid by households have four components.
- Cost of buying energy on the wholesale market
- Network service charges
- Metering and billing costs
- Environmental obligations
A community-owned community battery buying and selling prices can exclude metering, billing, or environmental charges. The cost of buying energy and network transmission should be excluded if the energy is produced locally by the community. If the generation or consumption is behind the meter, the transmission and distribution costs should be zero, and the electricity produced locally should only pay the distribution costs.
A service provider company that operates a Community Battery has to buy and sell on the wholesale market, but it does not know who it is selling to, so it has to pay the costs of buying and selling. However, for comparison, we will assume both costs are the same for the battery.
EvoEnergy requires six cents per kWh for local distribution costs. The ActewAGL retail cost of electricity in the ACT during peak times is 36.8 cents. The cost of rooftop solar generation is about 7 cents per kWh in Canberra, so the total savings are about 30 cents per kWh moved from low-cost time to high-cost time behind the meter.
To simplify the calculations, the following assumes that for each kWh of storage each day, the battery can earn 20 cents, and there is 30% unused capacity. The yearly income from the Battery is $51 for each kWh of Battery storage. The only costs are Capital costs, and the Cost per kWh of storage is $700. The cost of battery storage drops by 15% each year, and the rate of return on Capital is 5%. Assume all the income is reinvested in more batteries and operating costs are treated as Capital.
After five years, the Equity Investor would have received $192 in dividends, reinvested the profits and have $873 in Battery Storage or a total of $1,065. The buyers would receive no Capital.
After five years, the Community Capital would have $2,328 of Batteries. The investor would be entitled to $1044 of its value, and the buyer would have $1,284.
The difference comes from the reinvestment of the Capital in the Community instead of it being extracted and used elsewhere.
While the Capital Value has increased, the costs of production have decreased. The productivity improvements can only last so long, and the Community would move the profits elsewhere to look for savings elsewhere. This contrasts with Equity Capital, where production costs are kept high, and the profits are moved elsewhere and often used for consumption.
Community Capital does not have exponential growth but moves to a steady state. In practice, the product costs would drop instead of the savings reinvested. Community Capital will cause GDP to drop while keeping consumption the same.
Regulation Change to Reduce the Price of Electricity
Community Batteries require the AER to change the regulations to allow electricity consumers to buy and sell to each other. The AER can change the regulations to allow communities to fund new transmission and distribution assets and reduce the cost of new and old finance. The recent review by the AER recommends that the regulated rate of return be increased by about 1% because international finance wants higher returns.
The AER could change the rules and allow transmission and distribution companies to finance new Capital with Community Capital at a 1% lower rate. This would reduce electricity prices, reduce inflation and increase the attractiveness of renewable energy. Requiring the old Capital to be replaced with Community Capital would reduce prices and continue until prices covered operating costs.
Scaling
Equity Capital has exponential growth until the market is saturated. Equity is top-down, and bigger is better.
Community Capital reduces prices until there are no more efficiencies when the system moves to a steady state. Scaling comes by replicating local communities with standard lower-cost group services across communities. Community Capital is cellular and bottom-up, allowing governments to rapidly accelerate the shift to zero emissions in Australia, starting with community batteries.
Investing in infrastructure to reduce electricity consumption and replace fossil-fuel electricity with renewables will reduce emissions. Suppose the return on investment comes from reducing the cost of electricity from these investments. In that case, the emissions reductions are proportional to the amount invested, and the rate is the return on investment.
Suppose each person requires an investment, including transportation, of $50,000 to move to lower-priced electricity. There are suppliers of Capital, such as banks, super funds or the Reserve Bank, which can provide the funds to give lenders a 10% inflation-adjusted annuity for the next twenty years. The suppliers of Capital can provide funds through the Community organisations that administer a Community Battery. The security to lenders is in existing Capital owned by each community.
Australia can achieve net-zero cities and towns by 2030 by recycling Capital backed by existing Capital in buildings. Significantly the infrastructure and machines can be increasingly localised so that the country becomes resilient and self-sufficient.
Summary
Community Capital is an evolution of the idea of Capital. Changing Capital so it is widely distributed across the community, consumes no resources to move, is invested to reduce resource consumption, and is controlled by future consumers leads to a sustainable, minimum-cost, resilient economy.
