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Permanent Local Renewable Energy Markets

This proposal outlines a strategy to finance local community assets, focusing on Renewable Energy and energy-saving technologies. The approach involves consumer participation and aims to reduce investment costs by increasing the speed of capital movement. The document discusses the challenges faced by PrePower One Cooperative in obtaining funds for installing solar panels and highlights the problems associated with compound interest loans. It proposes using simple interest loans to initially fund Permanent Local Renewable Energy Markets. It suggests that the Clean Energy Finance Corporation (CEFC) could provide simple interest loans to Local Community Collectives to prove the effectiveness of this approach.

Background
In November 2018, PrePower One Cooperative was formed to install solar panels on Cooperative members’ roofs at no upfront cost to consumers. The cooperative has twenty members, installed panels on one member's roof and has operated successfully since 2020. The funds came from other members, but more was needed to extend the system to others and from traditional sources to scale the system. The co-op could not obtain funds from super-funds (even self-managed funds) or interest-free loans offered by the ACT Government. Banks and Community Banks would not lend to a not-for-profit company and required personal guarantees from office bearers even though the assets purchased, plus solar panels on existing members’ roofs, more than covered the loan costs.

PrePower's challenges are institutional, particularly government regulations on lending and borrowing, the Reserve Bank's control over the money supply, and the widespread belief that money markets find the right price for capital. These factors hindered the ability to secure funds through regular channels and hence scale the system.

How Compound Interest Loans Distort the Economy
Compound interest loans assume that an interest payment is a return on the money and does not reduce the amount owed. Borrowers pay the interest by the lender extending the loan and assuming it is a return on capital; hence, it does not reduce the money owed, so the interest is still unpaid. This assumes that money earns the interest, and the lender gets some of the profits made by the borrower. Money does not earn more; a loan transfers money and does not create more money when repaid. However, compound interest enables a market in money, allowing money to make money and generate a profit.

Unfortunately, compound interest has missed an important step, making the approach problematic. When the interest payment is taken from the borrower’s loan account, the loan is extended, and when a loan is extended, money should be given to the borrower. If this is done, the extension cancels the interest owed, and the loan account returns to its original amount, with the interest owed being zero. The second interest payment is a capital return, and the interest is taken off the amount owed.

Interest should always be deducted from the amount owed and added back in. It is called simple interest, which reduces the cost of loans by eliminating unearned interest payments.

The Reserve Bank uses loans to introduce more money into the economy by authorising banks to make compound-interest loans. By requiring banks to use simple interest loans, the Reserve Bank can increase economic efficiency, as it halves the cost of borrowing by removing unnecessary interest payments.

However, banks have to choose who receives a loan. With compound interest, they do this by lending to those who offer the highest profit for the least risk, which is the already wealthy. This gives the wealthy a significant advantage and is the main reason for the mal-distribution of wealth in society.

An alternative is to give simple interest loans to a community and lend the money so that it stays within the community and is reused to build further assets. One way to do this is to lend to Permanent Local Asset Markets. Prepower One Cooperative illustrated the concept.

Permanent Local Renewable Energy Markets
The Reserve Bank does not want to use simple Interest loans, and they seem unlikely to change until they are shown to work at scale. However, there is no reason why Banks could not voluntarily use simple interest loans, and organisations with bargaining power, like governments, could request simple interest rules for their loans from banks. The CEFC could lend money with simple interest rules to Local Renewable Energy Markets and prove the approach.

The CEFC could provide simple interest loans to a Local Community Collective using a preliminary set of rules derived from Prepower One Cooperative's experience and modelled using NetLogo, an Agent-Based Modelling tool.

1. The money lent must buy or create assets owned by a Collective that generate, supply, or save renewable energy that the members of the collective purchase from the collective. The collective must never sell the assets to another entity and must invest its profits in other assets for the same purposes as the original loan. These assets must always be owned by the collective unless the members agree to the sale; in this case, the funds will be returned to the collective and distributed to members.
2. Members can sell existing assets to the collective at a standard price agreed upon by the collective.
3. Members own a share of the assets in proportion to the amount of money they have contributed to the collective, either as an investment or as purchasers of renewable energy.
4. Members all have one vote, irrespective of their number of shares.
5. Members can only sell their shares to other members.
6. New members apply to join the collective.
7. Shares always have a fixed price of $1, and their total value must always be equal to the total value of assets owned by the collective. 
8. The number of shares held by each member is adjusted monthly to match the value of assets.
9. When new assets are purchased—like solar panels—the person with the greatest need, as defined by the collective, has them installed on the roof of their home or elsewhere. The shares created from the installation use accrue to the member.
10. When a member pays for renewable energy from the collective, half the payment purchases shares.
11. Each month, every investor sells a percentage of their shares as determined by the collective.
12. Every month, every investor receives a percentage of the new shares in new assets as determined by the collective.
13. There is no charge to buy or sell shares.
14. Conflicts are resolved by the collective using a preferential voting system of all collective members.
15. Wherever possible, collectives deal with other collectives using the same rules to sell their services and assets.
16. Collectives initially work through existing retailers.
17. The AEMC still sets the price of electricity.
    If the CEFC is the lender, it is a collective member. The CEFC must sell a percentage of shares and will receive new shares as the collective sells renewable energy or saves energy. The CEFC funds will increase and be available for further investment in other collectives.

Outcomes
Existing financial and physical infrastructure and systems are initially unchanged. The approach is evolutionary and will incrementally adjust both the existing infrastructure and the new (soft) systems. The savings from the improved systems will fund the new systems so there will be little or no cost to governments.

In the above, no interest or insurance is necessary. No electricity market is required to set the price as profits are shared. The households share the profits of service suppliers who use the same approach and no longer have to pay interest. As most electricity to any household will come from the collectives, the profits going to distribution, transmission, and energy production companies can also go to the collectives. The profits, which are recycled money, are reinvested and will build up assets for local communities.

Members are expected to receive at least a 10% inflation-adjusted annuity over 20 years on their investment. For each payment, half the money paid will become a saleable asset that people can keep or sell. Collective members will use their accumulated assets as high-return liquid savings accounts. However, the return on investment can be higher for assets with a short life.

The systems and methods are open-source; banks can lend for other purposes like affordable housing..

The approach is scalable and will rapidly fund Australian electricity to zero-emissions technology without the government having to supply the funds from taxation. The funds can largely come from new money introduced into the economy as simple interest loans. The approach will remove the need for governments to fund most infrastructure and assets that will never be profitable but of value to the community.

Suggested CEFC Actions

• The CEFC finances PrePower One Cooperative to install fifty solar panels on fifty households and another community group to install and operate a community-owned battery. The CEFC sells its investments to the collective members and reinvests the profits in further assets.
• The CEFC finances a collective to operate the new systems required by Permanent Local Renewable Energy Markets. The collectives will acquire equity in the new systems with their payments to the new system collective. The profits from that system will finance the continued development of the systems.
• The CEFC work with banks so they can finance renewable energy technologies with simple interest loans.
• The CEFC works with governments to turn loans for renewable energy into simple interest loans.
• The CEFC works with housing collectives to release funds tied up in houses to finance renewable energy systems. For example, people who own or partially own their homes can sell into a Permanent Home Market to obtain funds to install renewable energy technologies.