A submission to the ACT Government calls for comment on their Integrated Energy Plan.
The Current Situation
Equity, financing and community involvement are major concerns to make the plan work. Traditional financing and community engagement have limitations and will not supply the finance needed nor easily include renters, low-income, the aged, and other social groups with little access to finance.
The reason is the global problem of expensive Capital Markets. Prices of goods and services keep rising while the marginal costs remain the same. Labour is replaced with machines and simpler processes, but the benefits from Capital investments are not distributed across the community. There are increasing costs from the slow-down in wealth transfer. Money accumulates in overpriced assets and is invested in financial assets that do not generate new wealth. The gap between the rich and the poor continues to grow, and investment continues in ways to destroy the environment rather than nurture it.
The Capitalist system is designed to create wealth. Wealth is measured in money and stored as money, and productivity is measured as the amount of money required to produce goods and services. The less money to produce the same goods, the more productive the process. When the price of the same goods goes up, we call it inflation, which applies to money and other goods and services. Inflation occurs because the cost of production goes up, there is an excess of money chasing the same goods, or money stagnates in overpriced assets. Today the movement of wealth from the poorer to the richer, shown by the increasing disparity in wealth, is one of the drivers of inflation and lower productivity.
The existing financial system uses free markets and government taxes to control where we make investments and divide wealth from those investments. Free markets control Capital formation by competition reducing prices. Governments also control profits by taxing them and redistributing the money to others with no Capital to make profits.
Problems with Capital
The system does not work as well as it could because Free Markets are rarely free. Profits from interest require no extra effort when interest rates rise. Oligopolies and monopolies like electrical transmission and distribution keep prices unnecessarily high.
Governments are loathe to increase taxes. However, the major failure of the economy is the exclusion of large population sectors from wealth accumulation. Addressing this will create a more productive society and provide the investment to address global warming and other existential threats to communities.
For example, the Reserve Bank attempts to control the money in the system by changing interest rates. To slow the economy, it increases rates. To speed up the economy, it decreases rates. Slowing is meant to reduce the movement of Capital and slow consumption. Speeding up is meant to increase the movement of Capital for new investment.
Unfortunately, when many loans are outstanding for existing housing, increasing interest rates also increases inflation and the discrepancy in wealth. Those without wealth pay extra, while those with wealth gain more. Changing interest rates often does not work as expected because an increase in interest rates can move investment to existing assets rather than new production.
An equitable and low-cost energy transition cannot happen quickly (or even at all) with the current methods of distributing and controlling wealth. We need better ways to adjust how wealth is distributed.
A Solution — Adjusting Wealth Distribution
An alternative control mechanism is available to the Reserve Bank and the government, but they do not use it. Australia would have zero inflation with a fixed, stable interest rate if they did.
The alternative shares profit and interest between investors and consumers and changes the rate of Capital movement by varying the profit or interest share between investors and consumers. More to the consumers speed up Capital movement for investment in new houses and reduces inflation. More to investors slows down Capital movement but reduces inflation from productivity increases.
If the distribution happens with each payment and money transfer, Capital movement is faster and cheaper. This will double the investment from a given amount of money as it moves investment dollars faster, so there is more investment from the same Capital. Transferring with payments is low-cost as it is part of the payments system. Most importantly, it transfers Capital to the consumers of goods and services, allowing everyone to participate in Capital markets.
Using Capital to transfer existing assets is normally less productive than producing new assets. The Reserve Bank, in consultation with the government, can discourage the transfer of assets by biasing the sharing towards consumers and encourage new investment by biasing the sharing towards investors. For housing, that means increasing the share borrowers receive on existing houses and increasing the share investors receive on new housing.
An Example of Sharing Wealth
Figure 1 — As the Bank’s Share of Interest Drops, Repayments drop at a greater rate than Interest to the Bank.
The following section on solar panels illustrates how sharing interest and profits works. The example chosen is financing Canberra Zero Suburbs so no one is left behind. It uses existing Capital, shared interest loans, annuities instead of dividends, and shared profits between investors and consumers of renewable electricity assets. The profits are on the cash flows (EBITDA), with all the profits going to investors when the business makes a loss and more to the consumers when the business makes larger profits.
Instead of Capital markets, Capital is transparently distributed with each transaction. Holders of Capital must sell some Capital each month to consumers as part of their annuity payments. This removes the need for price-setting Capital markets with their high costs, delays and inefficiencies.
The difference amounts in Figure 1 show the extra Capital utilised with different sharing. When 25% of the interest goes to the Bank, the extra Capital released starts to approach the value of the assets for long-term loans. The longer the asset lasts, the more wealth accrues to the consumer.
Panels on Canberra Roofs
The ACT integrated energy plan aims to make Canberra more energy resilient. One approach is to instal solar panels on most rooftops, thus generating a significant portion of the required electricity locally. This cost-effective and reliable approach saves money and ensures a stable energy supply. Installing solar panels worth $6,000 can result in annual savings of $2,000 if the electricity generated is consumed within the building.
Community members with $6,000 of panels can pay a proportion of the savings generated by the panels. This money is a profit of, say, $2,000. The consumer receives shares of value $X, where X is proportional to the profit in their local Community-owned Company or Cooperative. The money is invested into more money-saving renewable or energy-saving systems. Each month investors must sell a proportion of their shares to consumers who purchase electricity. The shares are exchanged at a fixed price through local markets each local Cooperative and Company runs. Investors and consumers share the profits with extra (or less) shares — not by share value changes.
Investments will continue to increase, but the demand for new renewable energy infrastructure will reduce. When this happens, electricity prices will reduce, and businesses and cooperatives stop growing and reach a steady state.
Assume the investment on the average house is $50,000, the return on renewable investment is 20%, and we want every house to be 100% renewable by 2030. The initial investment, including existing solar panels, is about $16,000. These funds generate the remaining $50,000-$16,000 ($34,000) from the investment money generated with each electricity payment.
Initial money could be supplied with Shared Interest Loans from Banks or inflation-adjusted annuities from Canberra residents. The Bank loans will be 10% interest shared by subtracting 75% of the interest paid from the loan balance. Other investments are 10% inflation-adjusted annuities for 20 years.
Shared Interest Loans Compared to Interest-Free Loans
The ACT government zero-interest loans scheme costs the ACT government $770 on a $6,000 loan over ten years (assuming a 5% interest rate), where the interest goes to the finance supplier.
With a Shared 75% Interest loan negotiated with a Bank (like Bank Australia) for community groups or cooperatives, the ACT government saves $770, and the banks get back $685 per year indexed for ten years or if they prefer an indexed annuity of $600 or 10% for twenty years.
The security on loans is the assets transferred from members to the Cooperative/Company and the assets purchased by the Cooperative/Company.
Shared interest loans give better benefits to consumers than interest-free loans or government subsidies for Capital Purposes, and there is no cost to the government.
The Reserve Bank and Shared Interest Loans
The Reserve Bank uses interest rates to control inflation. Shared Interest Loans give the Bank a better tool that can be easily varied without requiring borrowers and lenders to change their systems. When interest rates change, many systems must change, and adjustments must be made. When a shared interest loan is changed, most people would be unaware that anything has changed, and most operations are unaffected. What happens is that Capital moves more quickly, and the time for loan repayments will change.
It allows the Reserve Bank to fine-tune the economy, get an instant response in controlling it, and allow the Reserve Bank to target zero inflation and maintain it.
For example, to reduce inflation, the Reserve Bank could require Banks to speed up the repayment of occupier home loans. The Reserve Bank could require home loan repayments to speed up by increasing the occupier interest share. When Banks increase their profits on particular types of loans, it increases investor returns and encourages that part of the economy to expand.
To see more on this idea, please sign this petition to the Reserve Bank asking them to use this approach to control inflation.
However, any bank can use the same approach and gain customers. Bank depositors do not miss out because the benefits or costs accrue to borrowers, while the depositors should get the same. Bank profits will stay the same, and shareholders will get monthly returns from selling a few shares.
The community’s advantage is that sharing makes funds available immediately and increases investment because Capital does not accumulate.
Implementation
Local consumer and investor ownership of renewable assets is a different approach from today’s funding of electricity supply. Today service providers own the transmission, distribution, coal-fired power stations, solar farms, and retail businesses. They keep all the profits from Capital. Local ownership keeps the Capital profits in the local community.
Today consumers and local investors rarely own any businesses that supply services. A distributed network changes the economics. It becomes economically efficient for consumers and local investors to own the suppliers of services with the assistance of the ACT government as follows:
- Consumers and local investors form shareholder Companies or Cooperatives to fund and operate local renewable electricity assets. These organisations do not issue dividends but distribute new shares backed by new assets. Investors get a return with new shares rather than share values increasing. Shares are transferred monthly from investors to consumers who receive shares when they pay for the savings made from the assets.
- Assistance is required from the ACT Government to work with the Reserve Bank to ensure with APRA, ASIC, Treasury and the ATO that the interest from Bank Loans can be shared with consumers and that superannuation funds can invest in the local Companies and Cooperatives.
- The system is introduced without changing the existing operations of retailers. This applies to investments in community batteries, solar panels, insulation savings, monitoring and measuring systems.
- Legal agreements are needed to fit in with existing legislation.
- Accounting procedures need to be added to existing accounting packages.
- Governance and administrative services need to be established. In particular new service providers to the Cooperatives/Companies should be Community owned and operate like the Renewable Local Cooperative/Companies and share their profits.
While there are changes to the agreements on sharing profits, there is little or no change to the operations of Banks or Businesses. The change is incremental as the approach is compatible with the existing systems and legislation.
Summary
The ACT can achieve the social and technical goals of the Integrated Energy Plan by sharing profits with the consumers and investors in electricity with each payment for electricity. Sharing when consumers pay for a service speeds up the transfer of Capital embedded in each payment and reduces the cost of Capital transfers. Monthly sales of a few investor shares make the Capital available for further investment, allowing investors to reinvest their profits. The cost savings and the value of the increased investments accrue to everyone in the community, providing an equitable and lower-cost transition from fossil fuels to renewable energy.
In submitting this proposal, it is important to note that they enhance and complement the current strategy. The suggested solutions aim to empower communities limited by biased regulations and operations within the Capital Markets. These biases and restrictions often benefit those with wealth, making it challenging for individuals without financial means to invest.
