In Part 1 we looked at the drivers for aggregating low carbon and renewable energy projects across cities (https://www.pyterra.co.uk/aggregating-low-carbon/). Here we look at the solution to making it more feasible to do this and reach sufficient scale to attract investment.
It’s important to understand what is happening here from an economic viewpoint, and for that I am going to steal some words from my friend and colleague Cedric Torossian. The existing model of supply and demand in this market is broken. Investing in these systems is often unaffordable and suppliers cannot lower their prices because their innovative technologies mean they only have a small share of the market, have yet to scale and can only generate small profits. As a result, the equilibrium price – where demand crosses supply – is not met. There is a funding gap and it needs intervention to close it.
The economist John Maynard Keynes said this intervention should come from the State in order to increase spending and artificially boost the demand side. This in turn would stimulate the supply side, leading to more employment, more production, and consequently more tax payments which then can be used to repay what the State had paid for in the first place. Why hasn’t this worked? Because Keynes made the fatal mistake to remember that capitalist economies are open. So when a State increases its spending, consumers may spend more but often they buy cheaper imports. Rather than stimulating the local economy, it leads to a huge deficit in the balance of payments. Basically Keynes’ idea was a bucket with holes in it.
However, where it is not the State and rather local corporate sponsors closing the funding gap and injecting cash, then end users can afford to make transactions and do so within a local economy which can be more closely managed. This allows suppliers to scale and reduce costs until the natural price of the market is met. Suppliers start to generate profits and repay sponsors or give them equity. In a way, this is a form of Keynesianism, but instead of the State spending to stimulate the supply, private sources of capital are employed.
This is quite a radical departure for the way for the UK commissions its infrastructure and it remains to be seen how the relationship between State and sponsors should develop to promote corporate interventions. Loan guarantees would be a good start.
Why should this work? Because it is local and controlled; it is not public but private money, and money is not given to end users (discounts can be offered though in a back-door move which puts funding indirectly into solution suppliers but in the process also incentivises the engagement of end users). Enrolling solution suppliers into such schemes means that only they will benefit from the gap funding and the money will not be spent on cheaper imports (assuming there is some control over suppliers’ own supply chains through the conditions of the sponsorship). The challenge is to make a bucket with no holes!
We are not quite there. The real world is a lot messier than a theoretical economic model. Without guidance on the ground, this objective of scaling projects by incentivising solution suppliers will soon grind to halt. There is a significant role here for community organisations, such as carbon coops, to act as advocates for this approach. They can survey the needs of their members, promote the concept of group schemes and pooled funds, and they can help facilitate conversations between communities and solution suppliers. But even if they are willing, they won’t have the resources to freely participate. So, at the same time as addressing the funding gap of projects through finance, why not broaden that mission and include funding for community organisations?
In the next blog, we look at the enthralling subject of business models for aggregated projects! Do join us in the Low Carbon Collaboration Group on LinkedIn for discussions around this topic (https://www.linkedin.com/groups/12546085/).
© David Arscott June 2021