A first approach on the financial side

My editorial

Here is the deal: I officially authorise my provider of electricity to transfer on third parties the nominal value of my future liabilities resulting from the contract of energy supply. The transfer can be done in the form of IOUs, or promissory notes. In exchange of such an authorisation I get a discount on the price of electricity. I get a lower price, and my provider gains more liquidity as they can cash now my future liabilities to them. I mean, this is the deal I could possibly make at the exchange platform I am just inventing for my project EneFin, i.e. a FinTech functionality for the market of energy.

As I am working on the EneFin project, I have become aware how important legal analysis is. I started doing it, step by step, in my last update in French (seeLes marchés possibles à développer à partir d’une facture d’électricité). The deal I began this update with can be technically presented as present discounting of a future expected stream of payments. I (and you too, by the way) have a very predictable consumption of electricity. Most of us are highly predictable as for how many kilowatt hours we will consume, monthly, over like the next two years or even more. In many cases – as a matter of fact in most cases, I think – the electricity bill we pay monthly corresponds to a smoothed prediction of our future consumption of energy, priced according to the contract we have signed with the provider, rather than to our real, actual consumption of kilowatt hours over the last 30 days.

To my provider of electricity, the contract they have signed with me, together with such a smoothed prediction of my consumption, represent a chunk of liquid capital, to be cashed progressively over time, by instalments. What if my provider wanted to cash this capital right now? What if other providers, for example those who want additional liquidity in the future and have more than enough liquidity today, thank you very much, we have all the cash we need now, wanted to by that future liquidity from my current provider?

Whatifs, which are the neologism I invented to name the outcomes of ‘what if…?’ questions, have their contribution to the development of science. Most breakthrough experiments in science start with a whatif. In the preceding paragraph, I named two whatifs, and it is an intellectual duty on my part to study them. I quickly sketch two markets: that of the strictly spoken household consumption of electricity, and a second one, made of electricity consumed in transport if, hypothetically, all transport went electric. Hence, I have one actually existing market (households) and another one a bit futuristic.

Now, in those two markets, I imagine a FinTech utility, in the framework of my EneFinproject, where both the suppliers and the users of electricity can auction their future. Suppliers auction their future capacity (this is already being done on a routine basis), and users auction their future liquidity regarding energy bills (this is precisely the novelty with EneFin). I have that intellectual habit, when I come up with a business idea, to test it very quickly on any empirical data available. Here, I want to have some idea about their size and value. I start with getting data about individual consumption of energy. I turn to the World Bank and I download their data about energy use (kg of oil equivalent per capita), as well as indicative information about the structure of final consumption in energy, by the European Environment Agency, and, finally some data about electricity prices, by Eurostat. To all that, I add a pinch of data about population, by country, as provided by the World Bank.

I have my ingredients in front of me, and I start cooking. There is that thing about me and cooking: as a true scientist, I never know exactly what the final outcome will be. Some people complain, but you know what? Some people always complain. Anyway, I am cooking and here comes the first dish: an estimation of my two markets in a few European countries, presented in tables 1 – 3, further below. Consult this data at your pleasure and leisure, and I am developing on the business model. I assume that the auctioning I plan has any point if the participants can derive any substantial utility from it. The utility for suppliers is that of acquiring future liquidity, under two forms. Selling future electrical capacity assures them smooth sales in said future, and buying the users’ future liquidity gives them smooth financing of those future sales.

Now, it is important to understand what ‘smooth’ means regarding financial goods. It means ‘freely tradable’. In order to make future capacity in suppliers, and future liquidity in customers freely tradable, you need to have them securitized. No, it doesn’t hurt. I mean, it shouldn’t if done properly. Securitizing an obligatory contract means that individual claims are being singled out of that contract, and transformed into tradable deeds, like notes or tokens of cryptocurrency. The utility of securitizing, thus of making claims freely tradable, is in the fact that once securitized, those claims become abstract carriers of value, detached from causal links to their initial socio-economic context. That detachment has a legal side. In most legal systems, you can find an institution called ‘transfer of claims’. If you have a claim on me, e.g. to be paid $200 for something, you can transfer that claim on a third party, upon giving me proper notice, and I can transfer my liability, vis à vis you, to a third party, upon giving you notice and receiving explicit consent from your part.

Transfer of claims is possible, but in practical terms it is quite burdensome. Once we enter into the maze of questions like ‘Was the notice of transfer sufficiently clear and effective to assume that the addressee of the notice really knew what they are doing?’, it is not soon that we will see light at the end of the tunnel. On the other hand, once we securitize a claim, it can be traded (thus, de facto, claims can be transferred) without the whole ‘notice-and-consent’ circus.

When we securitize claims and make them tradable, the primary and essential function is precisely this: making those claims tradable, i.e. liquid. We cannot say anything a priori about the resulting economic equilibrium, or the lack thereof, just as we cannot preclude on justice and fairness, or, once again, the lack thereof, in the corresponding markets and contracts. Securitization gives higher liquidity to contractual claims, which, in turn, makes it easier to come and go in and out of deals at lower a risk. In that sense, securitization can reduce transaction costs, as long as it does not create its own, excessive risk. That’s the tricky question about options, for example. Technically, trading options on the price of a security should allow you to hedge the risk incurred in trading that security properly spoken. Still, prices of options tend to swing much wider than the prices of their base instruments, and you have more risk instead of less risk.

Thus, when, in my EneFinidea, suppliers auction their future capacity, and users auction their future liquidity, it is supposed to give additional liquidity to the market of energy, thus to reduce transaction costs. I haven’t the faintest idea if it is going to make a better market, whatever the denotation of ‘better’ could be, but it is likely to produce faster change in the market. This is what financial markets are for: facilitating change.

On the grounds of the three cases I studied for as business models– Square Inc., FinTech Group AGand Katipult – I think that the Katipult-like pattern looks the most workable on the suppliers’ side of the market. It implies the creation of a Blockchain-based transactional universe, where participants buy their initial software licence and then pay a monthly fee for staying in the game. It can be combined with marketing a FinTech technology designed for other platforms. On the demand side, i.e. that of electricity consumers, I think it is unrealistic to expect them paying for accessing the transactional platform, thus the price the consumers can pay to EneFin is a transactional margin.

I can make a first outline of revenues in the EneFin project by now: Revenue (EneFin) = Access fee to the transactional platform (Energy suppliers) + Monthly fee (Energy suppliers) + Gross margin on transactions (Future liquidity in consumers). Now, I take the estimate of annual household consumption of electricity, from Table 3, further below. I take two cases: Poland and France, thus, respectively, € 28 548 329 421,59 and € 84 037 923 404,69. To simplify: Poland – €28,5 million and France – €84 million. I assume that any economic agent can increase their liquidity by simply borrowing money from a bank. Further down this path of thinking comes the idea that EneFin’sfees should be lower than the real interest rate, which is like 7% a year for households, and using EneFinin order to assure liquidity should stay competitive in comparison to borrowing. I make the average fee of EneFinlike 3,5% on the typical transaction. That makes a potential market for EneFin, in this particular segment (electricity bills for households) worth a total of 3,5%*€ 28 548 329 421,59 =  € 999 191 529,76 in Poland and 3,5%*€ 84 037 923 404,69 =  € 2 941 327 319,16 in France.

Good, I have a first approach on the financial side. From this point on, the challenge consists in tracing a realistic path of development inside those markets.

As we talk business plans, I remind you that you can download, from the library of my blog, the business plan I prepared for my semi-scientific project Befund(and you can access the French versionas well).

I am consistently delivering good, almost new science to my readers, and love doing it, and I am working on crowdfunding this activity of mine. You can support my research by donating directly, any amount you consider appropriate, to my PayPal account. You can also consider going to my Patreon pageand become my patron. If you decide so, I will be grateful for suggesting me two things that Patreon suggests me to suggest you. Firstly, what kind of reward would you expect in exchange of supporting me? Secondly, what kind of phases would you like to see in the development of my research, and of the corresponding educational tools?

Table 1

Country  Current consumption of energy, 2015, in kg of oil equivalent per capita Current consumption of energy, 2015, in kWh Estimated household use, kWh Estimated use in transport (hypothesis of 100% electric transport)
Austria  3 804,49  44 246,27  7 654,60  9 512,95
Switzerland  2 960,07  34 425,65  5 955,64  7 401,52
Czech Republic  3 860,00  44 891,83  7 766,29  9 651,74
Germany  3 817,55  44 398,10  7 680,87  9 545,59
Spain  2 571,34  29 904,70  5 173,51  6 429,51
Estonia  4 173,33  48 535,79  8 396,69  10 435,19
Finland  5 924,70  68 904,26  11 920,44  14 814,42
France  3 687,82  42 889,32  7 419,85  9 221,20
United Kingdom  2 763,98  32 145,09  5 561,10  6 911,19
Netherlands  4 233,04  49 230,30  8 516,84  10 584,51
Norway  5 815,81  67 637,84  11 701,35  14 542,14
Poland  2 490,21  28 961,10  5 010,27  6 226,64
Portugal  2 131,68  24 791,46  4 288,92  5 330,16

 

Table 2

Country Price of electricity for households, € per kWh Non-household price of electricity, € per kWh Estimated value of household electricity market per capita Estimated value of transport electricity market per capita
Austria € 0,20 € 0,09 € 1 530,92 € 856,17
Switzerland € 0,19 € 0,10 € 1 131,57 € 759,18
Czech Republic € 0,14 € 0,07 € 1 087,28 € 675,62
Germany € 0,35 € 0,15 € 2 688,30 € 1 431,84
Spain € 0,23 € 0,11 € 1 189,91 € 707,25
Estonia € 0,12 € 0,09 € 1 007,60 € 939,17
Finland € 0,16 € 0,07 € 1 907,27 € 1 037,01
France € 0,17 € 0,10 € 1 261,37 € 922,12
United Kingdom € 0,18 € 0,13 € 1 001,00 € 898,46
Netherlands € 0,16 € 0,08 € 1 362,69 € 846,76
Norway € 0,17 € 0,07 € 1 989,23 € 1 017,95
Poland € 0,15 € 0,09 € 751,54 € 560,40
Portugal € 0,23 € 0,12 € 986,45 € 639,62

 

Table 3

Country Population Estimated aggregate value of household electricity market Estimated aggregate value of transport electricity market
Austria 8 633 169 € 13 216 699 535,91 € 7 391 420 116,18
Switzerland 8 282 396 € 9 372 121 038,65 € 6 287 807 395,97
Czech Republic 10 546 059 € 11 466 521 464,97 € 7 125 150 621,30
Germany 81 686 611 € 219 598 519 581,44 € 116 962 052 130,50
Spain 46 447 697 € 55 268 478 324,52 € 32 849 950 047,12
Estonia 1 315 407 € 1 325 407 989,57 € 1 235 387 504,73
Finland 5 479 531 € 10 450 945 006,44 € 5 682 323 784,21
France 66 624 068 € 84 037 923 404,69 € 61 435 408 133,32
United Kingdom 65 128 861 € 65 193 862 378,91 € 58 515 364 595,07
Netherlands 16 939 923 € 23 083 943 387,14 € 14 344 068 867,73
Norway 5 188 607 € 10 321 326 740,48 € 5 281 739 797,49
Poland 37 986 412 € 28 548 329 421,59 € 21 287 482 632,28
Portugal 10 358 076 € 10 217 746 935,20 € 6 625 229 226,64

 

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