Financing Renewable Energy

We can finance renewable energy with traditional loans or we can finance renewable energy by envesting

The following calculations assume an energy price of 6 cents at the renewable energy plant gate and a running cost of 1 cent per kwh for the renewable energy plant.
Using an Interest Rate of 7%, a payback time of 20 years and traditional loans means renewable energy plants have to be built for less than a capital cost of 51 cents per kwh for the loan to be repaid. Any capital cost higher than 51 cents and loans cannot be repaid.  When calculating the economic viability of renewable energy we use discounted cash flow calculations which is the same as finance through traditional loans.Using envesting funding and assuming all the repayments are reenvested in renewable energy plants a capital cost of 51 cents per kwh pays back the loan and the rent on money within 20 years. It then leaves long term investors with an envestment that returns 15% inflation adjusted per year for any years of operation beyond 20 years.

Using envesting finance, a payback time of 20 years, a long term return on envestment of 7% renewable energy can be profitable up to 65 cents capital cost per kwh.  If we extend the payback period to 30 years the renewable energy can cost up to 142 cents and still be profitable.

We know we can build large scale solar thermal energy plants for capital cost of 46 cents per kwh and we know they will have a working life of greater than 20 years.  This is equivalent to a long term return of 20% where the pay back time is 20 years and where the envestment pays 20% beyond the 20 years.

Today using envesting finance we can profitably build as much renewable energy as we want without increasing the price of energy.

Why is there a difference between the two funding methods?  The difference comes because with envesting we assume that the repayments are used to build more renewable energy plants while with traditional loans we assume that the repayments go to pay off the loan.  With envesting compounding works to build more profits while with traditional calculations compounding works to increase the cost of finance.  This happens because envesting we use zero cost money while with traditional loans we pay an unnecessary fee for the right to use money as a measure of value.

The following graph shows the long term rent on money for envesting versus the payback time for a capital cost per kwh of 68 cents. Note the linear nature of the graph and the effect length of time has on the final rate of return.  This means pension funds could envest heavily in renewable energy plants so they can meet their future financial obligations to their members. Money envested 30 years ago will give an ongoing 15% per annum adjusted for inflation with renewable energy built for a capital cost of 68 cents per kwh.

A Simple Way to Stabilise the Monetary System

The reason that the economic system is unstable is that we have a monetary system where we pay interest on interest – or we allow interest to compound.  If we remove interest on interest we will stop the instability of the system.  The simplest way to achieve this is to create loans where capital is paid first, then interest and there is no interest on outstanding interest.  This immediately prevents compounding and with it instability.If a loan of $100K attracts an interest of 10% then we have a interest payment of 10K a year.  If repayments is 10K then the loan can never be paid off with an interest first loan because we have to pay interest on the interest.  However, this is clearly unfair because the lender has received the 10K which they can reinvest to get more interest and so the lender is “double dipping”.  They continue to get the interest on their original 10K and they get the interest on the repayment of capital.

Alternatively if the interest accumulates as a credit to be paid after the loan is repaid and the interest does not itself attract interest then as long as some of the capital can be paid off each year then the system will stabilise.

Perhaps the simplest way to understand it is to stop calling interest on money interest and to call it rent on money.  If rent is used to purchase another place then rent can be charged on the new place but there is no justification for charging rent on rent if the rent is not reinvested.

The other way to understand the problem is to note that by changing the interest rate from say 5% to 10% does not result in a doubling of interest paid but several times more interest. The amount paid is not linear even though the cost increase appeared to be linear.  The result of this is that for the transfer of capital goods the amount paid tends to be much much greater than expected.  This in turn results in the devaluation of the currency or inflation which occurs when we pay more for goods.  Simply changing the way we account for loan repayments will bring certainty to the cost of capital goods and with it little or no inflation of the goods or services being transferred.

We will use the name envesting instead of investing to distinguish between investments where where capital is returned first and rent is not paid on rent and the case where interest is paid first and interest accumulates on interest.