On Energy Independence
18th October 2016
Chris Cook explores how resilience, security and independence are bottom up not top down. This is how we move from a national grid to a natural grid.
Independence is not a policy: it is an aim of policy, in the same way that Security and Resilience – which may be seen as aspects of Independence – may also be aims. I have been conducting action-based research into financial resilience (a system which does not come to within two hours of ATMs being switched off); resource resilience (keeping the lights on) and human resilience (capacity building).
If resilient local infrastructure is networked then the result will be regional and national resilience. In other words, resilience, security and independence are bottom up not top down:. Since my experience includes decades in energy markets, much of it at high level, it seemed to me the best place to start is to develop and implement policies aimed at energy independence where I live in Linlithgow. In other words, West Lothian Questions have West Lothian Answers.
A Natural Grid
In 1973 the 400% oil price increase from $3 to $12 per barrel – the Oil Shock – exposed Denmark’s 90% reliance on fossil fuels. The pragmatic reaction of the Danes was to apply the organising principle of resource resilience – or least resource cost – to fossil fuels. In other words, the Danes mandated that for any given use of heat, transport, power, light and other energy services the purchase of oil & gas as a commodity would be minimised.
This principle was applied across all possible energy services. It led to renewable energy, where the Danes acquired Scottish wind turbine technology and through building out turbines across Denmark created the biggest global wind turbine manufacturer (Vestas) in a country with a similar population to Scotland. It also led to heat infrastructure throughout Denmark, notably combined heat and power; district heating and heat storage (infinitely cheaper than electricity storage); also to fiscal policies discouraging car use and enabling a switch to public transport and bicycles; and finally to massive investment in energy efficiency in buildings, and in zero waste generally.
The outcome has been that since 1973 while Denmark’s GDP has doubled, their use of energy has declined and their use of carbon fuels (and CO2 production!) has declined significantly. This image strikingly illustrates how Denmark’s fairly centralised National Grid evolved in the direction of what I term a distributed Natural Grid.
Linlithgow Natural Grid
Every village, neighbourhood, town and city in Scotland may develop such a Natural Grid. The aim of the Linlithgow Natural Grid (LNG) initiative was and is energy independence for Linlithgow. Our approach is straightforward: firstly, to benchmark existing energy generation and use, and secondly then to make whatever interventions are necessary to develop Linlithgow energy sources and to reduce Linlithgow energy use through the use of the resource resilience organising principle.
But how can these interventions be afforded? Firstly, energy independence with an oil price above $50 per barrel is an economic no-brainer. We currently see over £6.5m a year in the cost of energy services such as heat, transport, power and light bleeding out of Linlithgow to sheikhs, oligarchs, and the shareholders of the Big Six. The bad news is that as the cost of finite fossil fuels rises further, as it inevitably will, this bleeding will get worse. But the good news is that the more expensive fossil fuels become in £ then the more £ profits are to be made in saving them. What has been lacking is the correct energy market model and funding instrument.
Energy as a Commodity
The energy market model or ‘paradigm’ which has evolved since the mid 1990s sees generators buying fuel as a commodity and then selling electricity as a commodity to consumers for profit. One perverse outcome is that renewable electricity generation must be subsidised because it is sold wholesale for (say) 5p per Kilo Watt Hour to the Big Six but is then bought by consumers at a retail price of 15p/ kWh. A second perverse outcome is that the Big Six resist energy efficiency savings since these act to reduce demand for their product and reduce their profits.
As major carbon-fuelled generation has been closed for environmental/climate change reasons – most recently Scotland’s last coal-fired power station at Longannet – the UK Grid has become increasingly fragile with very little spare generation capacity. In order to fund new infrastructure further complexity has been introduced, such as markets in CO2 Emissions and Capacity,
But as was publicly recognised for the first time at the recent World Energy Congress in Istanbul the reality is that electricity – like water (which is currently being commoditised/marketised ) – is not a commodity but is a service requiring a different market structure and instruments.
Smart Markets & the Fifth Fuel
Consumers don’t use raw oil, gas, refined fuels or even electricity: they use heat, light, transport/mobility, communications, and power (eg to drive machines). Financing operating costs may simply be achieved through consumers sharing the cost of a utility via a Platform Co-operative legal platform. But what about the vast cost of funding new infrastructure? This is where we may learn lessons from the past to create the new Smart Markets of the future.
James Watt’s Smart business model for Cornish tin mines water pumping in 1778 shows the way. Instead of selling his more efficient steam powered pumps to drain the mines of water, he supplied the use of his pumps in return for a third of the coal the tin mines saved. The more reliably and efficiently his engines worked, the more coal was saved. In other words, he did not sell his pumps as a commoditised transaction for profit: instead he shared the carbon fuel savings – through a simple production sharing agreement – achieved from Pumping as a Service.
Hard nosed commercial energy companies such as Exxon are increasingly referring to the intellectual value which creates energy savings through efficiency as the Fifth Fuel which Scotland possesses in abundance. But how may the economic benefit from Scottish Fifth Fuel concepts be retained in Scotland? And how may nuclear and unconventional energy generation with unknown future environmental costs be avoided?
Fracking – a Modest Proposal
On a recent panel in Dalkeith with Tom Pickering of INEOS I engaged not on environmental grounds (which I leave to experts) but on my home turf of energy market economics. Upon hearing that Grangemouth uses as much energy as Edinburgh, Glasgow and Dundee combined – much of which is often visible in the atmosphere from where I sit – I suggested that it would make more economic sense for INEOS to invest in heat as a service than in fracking.
Waste Grangemouth heat could be piped to Grangemouth & Falkirk homes and businesses while the colossal underground Central Belt heat resource of former mining areas could also be accessed using local skills and experience. INEOS could simply fund the supply of heat as a service in exchange for natural gas savings to be used as a petrochemical feedstock. Although the audience seemed to appreciate it, this modest, if unexpected, proposal seemed to pass its recipient by.
Back to the Future
History provides solutions: firstly, we see that instead of selling ownership of intellectual property how it is possible to exchange its use for a flow of value from energy production (solar as a service) or from efficiency (carbon fuel savings).
The second innovation pre-dates modern finance capital of equity shares (via stock exchanges) and debt (from banks). In exchange for value received, an energy producer may simply issue a promise (credit instrument) which is returnable in payment for future energy supply. Note that such a credit is not a debt instrument, since the holder cannot demand money; it is not a derivative (forward) instrument since he cannot demand delivery either; and it is not an equity instrument since it confers no ownership or dividend rights.
Acceptance of energy credits requires trust in the producer to supply energy in the future against which energy credits may be returned in payment instead of £ sterling. As an investor who has provided value to the producer, the acceptor (literally) returns his promise in exchange for the intrinsic value of energy: indeed this accounts for the origin of the expression ‘rate of return’.
The shipping industry gives us a steer as to how a trust framework may be provided. For some 140 years shipowners have clubbed together to mutually assure risks which underwriters at Lloyds of London will not accept. Such mutual Protection and Indemnity (P & I) Club agreements – which are managed by a service provider (Thomas Miller) – could easily be applied to the mutual assurance of the risk of non-performance by energy producers.
A Low Carbon Enlightenment
While the attention of global investors has been on renewable energy, the real low hanging fruit – efficiency savings from heat/cooling and transport – has been largely ignored for want of technology and funding mechanism. But it was clear from discussions in Istanbul that there are two powerful commercial drivers which a Smart Market in energy services can harness. Firstly, the more expensive finite fossil fuels become the more profitable it is to save them, and secondly, companies using the Fifth (intellectual) Fuel as service providers need far less finance capital than the Big Six need to address market and credit risk in a role as intermediary middlemen.
Glasgow was once the Workshop of the World, and regions such as the Central Belt, North East England and South Wales remain repositories of vast reserves of the Fifth Fuel of energy engineering innovation, expertise and experience. The application of the Smart Market combination of energy as a service and energy credit funding is complementary to energy commodity markets and could lead to what I recently heard described as a Low Carbon Enlightenment.