The world's economy appears to be contracting in real terms due to peak oil extraction, and this negative growth environment may be permanent. Once this trend is widely recognized, our usual way of financing economic activity - using debt and compounding interest payments, while rolling over the debt again and again - may not work anymore, because that process depends on real economic growth.
Having less oil to burn, there will be less economic activity, and massive debt repudiation could follow.
Kilowatt Cards is a working model of aￂﾠfinancial product that should be safer to own in an environment of negative real growth, and,ￂﾠtherefore,ￂﾠcould be used to raise capital for diverse enterprises, including non-profits.
This kind of financial security promises to pay for a fixed number of kilowatt-hours of electricity, on demand, toward any consumer's electricity bill.
Electricity is a tangible product, vital to life, and can be easilyￂﾠ"delivered" (that is, paid for) to benefit anyone who already pays for their own electricity supply.ￂﾠ
We can pay for your electricity in the same way that we can send you mobile telephone minutes. That is, if you provide a utility account number we can send your electricity company money toward your account.
This opens a new method ofￂﾠcapital formation based on exchanging fungible kilowatt-hour liabilities (such as paper notes) for real assets.
To raise investment capital, an issuer of kilowatt-hour liabilities might lend its paper notes to a borrower, which loan would be secured by a lien on property, just as a bank would do.
If the seller were willing to accept the kilowatt-hour paper directly as payment, then the purchase process would be straightforward.
Alternatively, the kWh paper might be sold to supporters of the borrower, who would then hold kWh claims backed by the balance sheet of the kWh issuer, not the balance sheet of the borrower.
That is because as the kWh's are redeemed to pay for electricity, they are backed by all of the issuing system's assets, rather than by any particular loan. Suitable rent-producing assets may include farm and timber land, commercial or rental properties, trademarks, heavy equipment leases, etc.
To function in this way a kWh security must be structured toￂﾠserve as both a store of value (energy) and as a medium-of-exchange. One way to do both is by permitting anyone to redeem the security to pay for electricity in any consumer utility account.
Kilowatt Cards isￂﾠa working model demonstratingￂﾠthat such instruments canￂﾠfinance housing and other enterprises without economic growth. Growth is not needed becauseￂﾠkilowatt-hours of electricity represent a fixed amount of energy or "work" in the scientific sense.ￂﾠ
A fixed amount of energy is a physical constant, so this type of security can haveￂﾠstable value. A kilowatt-hour is a kilowatt-hour, and always will deliver exactly the same amount of energy when the note is redeemed at faceￂﾠvalue.ￂﾠSinceￂﾠkilowatt-hours of electricity do not depreciate, interest payments are not needed to maintain their value or buying power.
However, there is a risk for borrowers who need to repay loans by acquiring kilowatt-hours, which is that the price of a kWh note may change as electricity prices rise and fall.
Kilowatt Cards are issued by a non-profit corporation foundedￂﾠto demonstrate and study this idea. Kilowatt-hour notes can be used to monetize or buy existing assets, much the way a bank does. However, by using kilowatt-hours liabilities instead of a national currency, such finance can be done without the usual need for continuous economic growth, normally required to pay back the compoundingￂﾠinterest charged by banks.
How Kilowatt Cards Work
Kilowatt Cards are simply gift cards which pay for a fixed amount of electricity on demand, anywhere in the world. The basic unit is 10 kilowatt-hours. These gift cards may be redeemed on the web by anyone, in any country, to pay for their own electricity.
We don't have (or need) agreements with any electric companies; we send each company money via online bill paying in the amount that their customer normally pays for the exact number of kilowatt-hours being redeemed (including taxes and fees).
Since anyone who pays for electricity may redeem Kilowatt Cards, they can be used as an international medium-of-exchange. Theyￂﾠalso function as an inflation-proof store of value. This system is still experimental but operational.
Ourￂﾠinitial purpose was merelyￂﾠto demonstrate that fixed-value paper can exist; its value being fixed because one kilowatt-hour of electricity is a physical constant, like one kilogram of pure water.ￂﾠOur expectation was that wealthy people would use suchￂﾠpaper kilowatt-hours asￂﾠan alternative asset class, to diversify.
However, itￂﾠappears that a fixed-value, universal medium of exchange has some other good uses. For instance, the basic unit of 10 kWh is small enoughￂﾠso thatￂﾠanyone could buy and save them, even those who cannot afford a house, which is the traditional way of protecting against inflation. So nowￂﾠanyone canￂﾠsave without losing any value to inflation.
Also, a provider of paper kilowatt-hours could back an entrepreneur by lending himￂﾠkWh's to sell, to raise capital for a business. This loan of kilowatt-hours would be secured by tangible assets of the business and paid back over time (perhapsￂﾠpayingￂﾠinterest on the loan, perhaps not).
The investors would own paperￂﾠkilowatt-hours, not shares in the new business. The value of that paper would be guaranteed by the balance sheet of the kWh system, not by the entrepreneur's business, and therefore much safer.
For example, a property manager might borrow newly issued paper kilowatt-hours from the system and sell them to investors, then use the money to buy an apartment building. The loan of kWh's would be secured by the building, and the investors would own only the paper kilowatt-hours.
In practice, a kWh system would lend its paper to a business, which it would sell to Qualified Investors through an investment bank. The proceeds would go to buy real estate, equipment or inventory. The borrower would give the kWh system a lien or lease back on the asset, then repay the same number of paper kilowatt-hours back over time (perhaps interest-free).
The key to making this work is they would need to raise about 30% more money than the purchase price of the asset. The extra money would go into a liquid investment such as a bank Certificate of Deposit.
The interest income from the CD would be used to run the kWh system itself. The principal amount of the CD would be used to pay for electricity redemptions, if any. As the loan was repaid, its principal would also be available to pay for electricity.
Presumably not all of the kWh paper would be redeemed quickly (or ever), since the holders would be diversifying into a new asset, for the sake of stability. And such holders could just sell the kilowatt-hours though a broker to get their money out, without ever redeeming them for electricity.
The borrower could repay the kilowatt-hours in several ways:
1) Repay the loan with money, but converted into kilowatt-hours for accounting purposes, to ensure that the value repaid equaled the value loaned. In other words, if the cost of electricity were to rise significantly, then the cost in dollars to repay the loan would go up.
2) Buy Kilowatt Cards back from the original buyers using money or barter (e.g. vegetables, if the business were a farm) and then send the paper kilowatt-hours back to the lender. So, the original buyers would really be making a loan to the business secured by kWh paper, then getting their money back directly from the borrower.
Once this process is established and after the paper kilowatt-hours are registered as securities, the buyers could be ordinary members of the community rather than Qualified Investors, since the asset they wouldￂﾠget (paper kilowatt-hours) is relatively safe and such buyers will have diversified some savings into a stable asset (for a change).
If the underlying property were easy to manage, like rental housing units, the property could be owned and operated by the kWh system, having a property manager working as an employee rather than a debtor, and not responsible for paying back the kilowatt-hours sold to purchase the property. Such rental property could operate indefinitely under the ownership of a kWh system.
So inￂﾠgeneral, the value of kWh paper should be supported by rent-producing assets to keep up with inflation, but since the paper need not itself pay interest (being of constant energy value) the underlying assets need not engage in speculative growth. They need only be run prudently to hold value relative to inflation.
This seems like a new idea: financial capital that doesn't need growth to maintain its value.
Again, this is not an offer to sell securities. It is presented here for discussion purposes only.
In short, kilowatt-hours can be issued in exchange for money, commodities, equipment, trademarks, or real estate, and that value invested in productive assets such as rental properties, which are either owned by the kWh system directly or by a borrower of paper kilowatt-hours.
Rental income (or principal repayments, perhaps with interest) provide the means for the system to pay for electricity, if and when the paper is redeemed for electricity. However if the redemption rate were too high, some asset(s) owned by the system would need to be sold to pay for the electricity. So, not all of the system's assets can be secured loans - some assets must generate rent or capital gains, and some assets must be liquid.
If this kWh system were operated with 100% reserves, then the value behind all of the kilowatt-hours would be real - not debt, equity, options, insurance, fractional reserves or some other form of fictitious capital like carbon credits.
Uniquely among commodity-backed paper, we don't need to produce or to deliver the electricity. It is a purely financial product even though the paper is backed by a physical commodity which is actually "delivered" upon request.
What is Different About this Method of Capital Formation?
This finance method separates the users of capital (e.g., renters, property managers) from the owners of capital (holders of fungible kilowatt-hours). The kWh paper represents collective ownership of the underlying assets but in liquid form. The paper can be sold, or loaned, or used as collateral for a money loan, or itself invested in a business. It is capital.
Paper kilowatt-hours can have stable, tangible value which does not depend on bank debt because the underlying assets are owned by the system. Furthermore, value does not depend on the marketable price of any particular asset, or even on the rent generated by any particular property. Ideally the system will own properties in every country.
Another feature is one may borrow a sum of paper kilowatt-hours, convert it to money, and later repay the same sum of paper kilowatt-hours without regard to inflation. That is, no matter when or where the debt is repaid, both parties will know that the loan amount has not changed even if the cash corresponding to the sum of paper kilowatt-hours has changed. This feature should be useful for Islamic finance.
As described, this general method can be regarded as socialistic because neither the owners of the capital, nor the users of it necessarilyￂﾠhas an equity stake in a particular property. But it is capitalistic because the paper kilowatt-hours are tangible assets which can be sold, loaned orￂﾠused as collateral.
Paper kilowatt-hours may also be held in a time-deposit account, where they can not be redeemed, thus permitting some of the system's rental income or capital gains to pay dividends.
Why Don't Union Members Buy the Companies They Work For?
I once asked a Machinist's Union lawyer why don't unions ever buy the factories that are being closed and moved overseas? He said that banks and venture capital funds do not care to help unions buy companies (due to tribal loyalty, and lower profit margins) but that unions sometimes do ESOP's. (BTW, Employee Stock Option Plans are explained by Robert Kaiser in his book "So Damn Much Money." ESOP's enable a firm to borrow money from a bank in order to buy its own stock from the founder at inflated prices, and then give that overvalued stock to the employees over time, in lieu of real contributions to a retirement plan. The ESOP is a total scam.)
So I told this union lawyer how a kilowatt-hour system could lend its paper to union borrowers, and they could then buy viable businesses if they could sell the kWh paper to investors or friends and family, knowing that the proceeds would be used for that purpose, and also knowing that the kWh paper was secured by the assets of a larger enterprise.
Such union borrowers would need to pay back the debt of kilowatt-hours or loose control of the company just like any other debtor.
The lawyer asked only one question: "How many such financing's have you done?" "Just one" I said, "a wood pile" (that story is below) but he never followed up - too early.
My premise is that there are situations in which banks which normally lend in a given field (e.g., wind turbines) might pass on a project, perhaps due to a general downturn in the economy. But there would still exist investors/supporters who would help it happen - not by taking equity or senior debt in the project - but by taking kWh paper, since it is issued by a separate company with a larger balance sheet and diversified holdings.
Since the value of such kWh paper would not depend solely on the project in question, these investors/supporters would be safer. In fact, they could even sell some or all of their kilowatt-hours immediately and get their money out.
This scenario begs the question: How could an issuer of kWh paper be truly safe if it were willing to make loans to marginal projects? The answer (I think) is that it would raise more money from such investors/supporters than would be risked in that particular project.
For instance, if a borrower needed $50 million, the kWh system could issue $75 million worth of kWh's to the investors/supporters, so that there would be a $25 million "cushion" for the kWh system to invest elsewhere, e.g., U.S. Treasuries, and not exposed to that project.
Instead of financing a project with, say 30% equity and 70% bank lending, it could be done with 30% equity, 70% kWh lending, plus another half again (i.e., 35%) of extra money raised from the investors/supports to be a cushion for the kWh system and invested in something very safe.
Community Currencies and Mutual Credit Societies
Many community currencies and business barter exchanges are operating around the world. These groups inject new money and credit into a region to stimulate local business transactions. Essentially these are loyalty programs, in which members sell their excess capacity at a discount to generate business that would not have occurred otherwise.
A very sophisticated example of this idea was set up inside a preexisting trade association in Vermont. http://marketplace.vbsr.org/
The big limitation with all social credit systems, including LETS and time-banking, is that the members cannot easily spend their earnings on some real needs such as paying out-of-network suppliers, taxes, bank debt and public utilities.
One must inevitably spend such credits on goods and services available within a group, or not at all, because that is where people will accept the scrip as (sometimes only partial) payment. So these systems are really just loyalty programs, with elements of advertising and price discounting to stimulate sales within a group, and to attract new members to the group. Which is all fine as far as it goes, but not really an effective way to create social credit unless the group is really large and diversified.
Kilowatt Cards could be used to create mutual credit with value outside of the originating group. To see where this is going, my goal is to recreate "micro-credit" without the typical usury that makes micro-credit so popular with modern financiers.
Each member of a mutual credit society could have a pre-established credit line for Kilowatt Cards.
If one member wanted to buy goods from another member using borrowed Kilowatt Cards as payment, then the kWh system would issue new notes for that purpose to be repaid over time at, say 2% interest (split between the kWh system and the Credit Society). The seller of goods would then own the Kilowatt Cards and could sell them on a public exchange.
Repayment of these kWh loans would be the responsibility of the individual borrower, but in the event of default, the larger Credit Society would repay the Kilowatt Cards owed.
For small loans on the order of $10,000 value, this system could probably operate on promises alone.
To make larger loans requires security, so a Credit Society would need to hold liens against some real property of its members, as is done in the Swiss WIR system of social credit. Kilowatt Cards itself would need to be able to foreclose on that security if the Credit Society itself defaulted on its obligations.
The key would be have a public market for Kilowatt Cards to establish a trading price at all times. Since borrowers must get them to repay the loan, one should be able to buy Kilowatt Cards on the secondary market, as well as from members of the Credit Society who still have some, or by paying money to Kilowatt Cards to issue new kWh's at the going price and applied immediately to the loan repayment.
Whether such loans were made to a mutual credit society, a private corporation or to an individual, this way of creating credit amounts to the borrower assuming the risk of changes in the average world price of electricity, since the redemption price limit, and hence the trading value of Kilowatt Cards, will move up or down accordingly
1) This system is not about lending to un-creditworthy borrowers at lower rates than usual.
It is about establishing a new source of credit, where the funders bear less risk and own an asset who's value is derived from the value of electricity, an important commodity. Investor therefore will make a lot less money but should also loose a lot less money.
If the borrower's kilowatt-hour debt were secured by property that the system might own anyway, e.g., a nice building in New York City, then a default would result only in a change of property manager, from the owner with a mortgage to an employee working for the kWh system.
I see it as more like a REIT than a bank. The system would need to monitor properties and take corrective action against neglect, which would be considered a default. But the asset would not necessarily be liquidated, or auctioned off on the courthouse steps as a bank might do.
2) The funding is cheap.
Kilowatt Cards pay no interest, although they can themselves be loaned at interest, or kept in time deposit accounts which do pay interest.
The money to buy the underlying assets comes from the buyers of kilowatt-hours, who are motivated either by a desire to diversity, or to use them as a medium of exchange, or to help finance a particular project as an alternative to philanthropy.
Assuming that the system's total kilowatt-hour liabilities were openly audited, and that the underlying assets were free of bank debt (100% reserves, more or less) and title were publically searchable (e.g., court house land records), then the buyers could see if a kWh instrument was safe enough to hold for their purposes.
3) Low overhead
These kWh systems can be run as not-for-profit entities, like the old mutual insurance companies.
Why Kilowatt Cards Work Almost Everywhere
Since the price of electricity varies around the world, and within countries, one may ask how to value paper kilowatt-hours in terms of money. We presently limit the redemption price of Kilowatt Cardsￂﾠto 35 cents per kWh, so that a 10 kWh note is worth $3.50 at most, and is probably worth closer to $3.00. Eventually the trading price will be determined by supply and demand on a public exchange, or an OTC market maker such as a bank.
This redemption price limit was chosen because about 90% of all those who actually pay for electricity today pay 35 cents per kWh or less, e.g., rural Maine, Puerto Rico, Dominican Republic, and NYC. The plan is to adjust the redemption price limit as necessary to always cover about 90% of electricity consumers worldwide, by publishing a population-weighted index.
The reason for having a redemption price limit is because there are places like Barrow, Alaska, where electricity is $1.10 per kWh (and gasoline is $9/gallon and milk is $10/gallon). Obviously we can't redeem Kilowatt Cards for $11.00/10 kWh, since one could arbitrage the price difference, and drain the system of assets.
Paper kilowatt-hours can promote fair trade. For examples, in down markets resource producers could barter their goods for paper kWh's rather than selling them at distressed prices.
So grain could be deposited and stockpiled to create kilowatt-hours. The grain could be sold later, during stronger markets, thus smoothing out supplies. The paper kilowatt-hours could be sold by the farmer immediately, or used as collateral for a money loan, since their value is backed by the balance sheet of the kWh system not byￂﾠthe grain itself.
Because such barter transactions would relate to energy inputs, commodity values in kilowatt-hours should remain relatively constant. For instance, one cord of maple firewood (4' x' 4' x 8' = 128 cubic foot stack) contains about 750 kWh of energy, and so it should be worth about 750 kWh in paper form, now and forever, assuming the wood can be stored safely and sold locally.
It is interesting that any such commodity stockpile might be used as the inventory for an ordinary business, thus generating income for maintenance of the stockpile itself.
A kWh system could also capitalize a Fair Trade exporting business by making a loan of kilowatt-hours to an entrepreneur who could sell them to friends and family. The money would belong to the kWh system but used by the new business to buy goods (at a "fair price") then sold in another country at a profit. Some of the profits then pay the entrepreneur, while the remaining proceeds belong to the kWh system for another cycle of buy/export/sell.
Again, even if such money were lost the friends and family wouldn't suffer, because their kilowatt-hours have independent value, being backed by the kWh system's balance sheet not the export business.
If the export business became successful enough to attract capital in the usual way, the entrepreneur could do so andￂﾠuse it toￂﾠpay back the original kWh loan, and buy out the business.
Another variation could involve the entrepreneur getting a bonus of new kilowatt-hours issued by the kWh system for his own account, based on increased value of the export business, but remaining an employee.
My Operational Experience
Besides giving Kilowatt Cards as samples, I have put them into circulation in two other ways.
1) Barter for firewood: I traded W800 (i.e., 800 kilowatt-hours) to a young man for 1/2 cord of hardwood that he split and delivered to my land, where it was stored and later soldￂﾠto pay for electricity.
His intention was to barter the Kilowatt Cards for something, but he wasn't able to do that immediately, andￂﾠrather than saving the cardsￂﾠhe redeemed themￂﾠto pay for electricity in Virginia (about $90). I advised him to do that since Iￂﾠam currently the only person running the system, so if something happened to me the Kilowatt Cards wouldn't work anymore.
2) Barter for farm produce: Neighbors pay to belong to a CSA service in which I deliver vegetables to them obtained from a local Farmer's Market. If the farmers will take Kilowatt Cards I use them; if not I use money. The cash goes into a bank account, to pay for electricity and may eventually be invested in land, rental properties or commodities like firewood if the Kilowatt Cards are not redeemed too soon.
I am looking for an urban farmer or property manager who would like to acquire moreￂﾠland. This could be done by borrowing Kilowatt Cards (interest-free) and selling them to local supporters, in accordance with local securities laws, such as a Private Placement Offering.ￂﾠThe cash would be used to buy the land, and the farmer would commit to repay the loan of Kilowatt Cards.
Repayment could be done with money earned from operationsￂﾠand with Kilowatt Cards earned from barter,ￂﾠe..g, by trading vegetables for the Kilowatt Cards owned by the local supporters. (At that stage of developmentￂﾠwe would have a few other people working here as well.)
In summary, about 5% of the Kilowatt Cards in circulation have now been redeemed. The average price paid for electricity has been about $1.30/10 kWh. The highest redemption price paid so far was $2.71/W10 for 180 kWh in Manhattan, NY; the lowest was $0.53/W10 for 60 kWh in Little Rock, Arkansas.
Kilowatt Cards On the Web
Community Currency Magazine, June 2009 (cover story)