Use-Credit Obligations
= "issuing vouchers for future produce or services, and selling them at a discount, to attract customers".
Contextual Quotes
1.
"UCOs can help build the commons in all sectors, including housing (rent-credit obligations), land, water, food, digital infrastructure (broadband connection, mobile masts and a commons wifi connection for the town, that can be accessed by everyone) etc."
- Lowimpact.org [1]
2.
"Commons groups don’t have to go into debt or give away equity – a sure-fire way of delivering infrastructure back to the capitalist world. A UCO costs nothing for the issuer to provide. The commons sector hasn’t been able to grow to obtain infrastructure, because they’d have to go into debt or give away equity; then they’d have to make a profit to pay back the debt and to pay shareholders; wealth would leave the community and they wouldn’t be a commons any more. UCOs offer a savings instrument for the new economy that is non-extractive (if they’re managed well – i.e. they’re assignable not transferable), because they don’t give investors power. Investors can’t corner the market, because the commons group can just issue more, and they can also refuse to sell to individuals or companies that have too many already."
- Marcus Saul [2]
Description
Lowimpact.org:
"A use-credit obligation (UCO) is essentially a voucher that will be accepted as payment for future supply of goods and services. They’re most useful as ways of funding commons infrastructure (fundamental things that communities need, like housing, energy, water supply and food, owned by the community, not by private individuals, corporations or the state).
Imagine a group of local people or a community energy scheme who want to build a wind turbine or install solar panels on roofs to provide the community with electricity, but they don’t have the money to do it. Currently, they could go into debt or set up a company and give away part of it as equity, neither of which is ideal.
What they can do instead is to issue UCOs, denominated in units of electrical energy (effectively, kilowatt-hour vouchers) as a way of raising the money to put up the turbine. The UCOs are sold at a discount – i.e. less than the current price of electricity (because the issuing group is asking for your cash to do some work)."
(https://www.lowimpact.org/categories/use-credit-obligations)
Characteristics
UCO's as Savings
Lowimpact.org :
"If people believe that the price of electricity is going to rise, they will want to buy expensive future electricity at today’s prices.
This is why they’re such a good savings instrument – and particularly if you have a ‘basket’ of them. If you only have kWh UCOs, then when you retire, you’ll have to sell some to buy food and other necessities; but if you live in a community where you can buy energy, rent, water and food credit obligations, and maybe even care credit obligations, then you’ll have real security – all the things you need, at less than current prices. And if you don’t need some of those UCOs, you can sell them at the current price of what they represent.
...
They’re a very interesting form of savings, because they’re not denominated in national currency, but in useful things, like energy, food, rent for housing or office space, haulage, or any product or service. Energy-credit obligations are denominated in kWh, for example. This means that this kind of saving is inflation-proof, because a kWh now is the same as a kWh in 10 years’ time. The UCO will be good for the kilowatt-hours specified, any time in the future, whatever happens to the price of electricity."
(https://www.lowimpact.org/categories/use-credit-obligations)
History
Lowimpact.org:
"The basic idea isn’t new. Medieval ‘market money’ vouchers / tokens (see video) were in effect UCOs.
A famous UCO scheme was ‘Deli Dollars’, where a deli in Great Barrington, Massachussetts in 1989 needed $4500 to move premises, but couldn’t get a bank loan. So instead, they issued vouchers for food provided in the deli. They sold 10 deli dollars (that can get you $10 worth of produce) for $8 – a 20% discount. Demand was high, the deli made $5000 from the sale, local businesses began to accept them as payment, and they started to circulate as currency in the town.
When people bought deli dollars, the new premises didn’t yet exist – but the original deli did, so even if the new premises never opened, they could still spend their deli dollars in the original shop. There was no risk (unless the deli went bust). But if we go back to our energy group, selling energy-credit obligations (ECOs) to install renewables, they’re not currently producing energy, so it’s high-risk, as there’s a chance that the installations may never happen."
(https://www.lowimpact.org/categories/use-credit-obligations)
Interview
Marcus Saul, working around Energy Commons, interviewed by lowimpact.org:
"The genius of the use-credit obligations approach is that it can help small businesses avoid debt, by issuing vouchers for future produce or services, and selling them at a discount, to attract customers.
The example Marcus gives is a small farmer who, instead of taking out a loan to create an apple orchard, instead approaches a local cider-maker and offers vouchers for the apples that will be produced, but at a discount – so the cider-maker will get 120 apples for the price of 100 (say), when they’re harvested. The cider-maker saves money on apples, and the farmer gets the money required to set up the orchard. This is just an example, but the idea works for any kind of business.
In the case of energy, it means that communities will own their own energy infrastructure.
* The vouchers don’t come from somewhere else – they’re issued by the community?
Yes. In the example of the apples above – the farmer knows roughly how many apples can be produced, and in the case of energy, the community knows roughly how much energy can be produced with the infrastructure they want to build.
The purchasers of the energy vouchers (‘energy-credit obligations’, or ECOs) can redeem them for energy when required, keep them as a form of savings, or sell them for a profit.
So, for example, a community group want to put up a wind turbine. They issue vouchers, get the money to put up the turbine, and they’ll get customers because the vouchers represent cheaper energy than current market prices? Exactly. Plus, we offer vouchers to the local community first, and any left over are sold into the market. So we try to ensure local energy resilience, which is a big difference from other models. If communities generate renewable electricity, they export it to a grid (usually at a low price) and import it back (usually at a higher price). Instead, we distribute via a local micro-grid first, and only then, any excess is exported. This builds local resilience.
* In your ideal world (if you were energy minister, say), would all energy infrastructure be owned by communities, and everyone’s energy generated locally?
100%. You can’t have a healthy local economy without a functioning local energy system. If the energy system is extractive, it hinders the local economy. If we move away from the centralised model to a decentralised model, we’ll be able to train up more people in a range of diverse skills, repopulate and generate employment in remote areas, and spread energy production and demand more widely, rather than rely on huge, centralised energy companies. Also, the more remote locations tend to have more natural energy resources, but they never seem to get a good deal.
It’s similar to what happened with the discovery of oil in the Middle East and various other place. The agreements set up were highly extractive, which meant they benefited giant energy companies, but not the local communities. The same is happening now with renewable energy. Our model allows communities to own the energy production, and to benefit from the financial output.
* So your approach allows infrastructure to be built without incurring debt?
Yes. That’s the interesting thing. When you start to build the infrastructure, this is where the acceleration comes in. We’re creating a diverse infrastructure than can address different problems. We have agreements with equipment manufacturers (for example, wind turbines). They have production / salary costs, plus marketing, depreciation etc., so they need to get their kit to market and sell it. We provide an ‘energy as a service’ solution, working with the manufacturers as partners. They provide their equipment in return for energy revenues from our projects. So they get a long-term, secure income.
This is another good point for Chris’s plan – energy producers are rewarded for efficiency in providing really good equipment, whenever it’s required, so that the projects generate lots of energy, which provides their return."
(https://www.lowimpact.org/posts/building-the-energy-commons-marcus-saul-of-island-power)
Discussion
Updates to the UCO system as proposed by Chris Cook
Lowimpact.org:
"Chris Cook ... invented a two-stage process, whereby potential buyers were asked if they’d buy the ECOs when the turbine was close to being operational – once a significant amount of risk had been removed, in other words. Buyers provided an expression of interest in buying a number of ECOs when a certain stage of construction was passed. Once the community energy group had enough of these local promises, they could show them to (more hard-nosed) specialist energy investors and ask them to buy ECOs for the high-risk part of the project (at a larger discount, because of the higher risk), and show that they’d make a return by selling the ECOs on to locals, who’d already promised to buy them once the project was close to completion. (Even better, is to get the investors to agree up front that if enough locals make promises to buy, they will put the money up.)
Let’s say the turbine cost £1 million. So the group issue kWh tokens worth £2 million, and sell them to the investors for £1 million in cash. When the turbine is almost built, and the project has been ‘de-risked’, those investors can sell the ECOs to the locals, and make their profit. But this works out much cheaper than standard finance for the local energy group – who would otherwise be paying interest over 20 years. It’s short-term investment for the high-risk part of the project.
Another important Chris Cook invention was to make UCOs assignable, not transferable. To explain: a £10 note is transferable. Anyone who gets it can spend it, and it doesn’t matter where they got it from. They might have found it, or got it from someone who stole it – but they can still spend it. No-one will question where they got it. Transferable is clean and anonymous. That’s not the same for a cheque, which has (had? Does anyone use cheques any more?) someone’s name on it. It used to be that cheques were assignable – you could cross out the name on the cheque and write another one. The banks didn’t like this, as circulating cheques meant that people needed to borrow less money from banks. Plus it made the money supply hard to control, and there were fraud issues etc. But you could make a cheque non-assignable by drawing two lines through it. That was called a crossed cheque. Now, crosses are automatically printed on cheque books. So cheques became non-assignable and non-transferable. Banks were very happy to make cheques non-assignable, because it increased their hold on everyone’s finances.
So – looking back at our energy example above – what assignable not transferable means is that the local energy group holds the register of who’s got the ECOs. If I own some, then I’m the registered holder of those ECOs in the ledger. If I want to sell them, I can only do so to those registered with the energy group, and the energy group can refuse to register anyone they don’t like, for ethical reasons, or because they think they’ll siphon profits out of their local area. The commons groups have control of who they have on the register. This means transparency – anyone who owns the ECOs can find out who else owns them, so the group can make sure that ownership doesn’t become too concentrated, and they’re not used for speculation.
This protects against ‘regulatory capture’. If you’re offering what look like investment instruments on the open market to the public, in the UK you’re going to be investigated by the Financial Conduct Authority; and if you get big enough, you’re going to be of interest to the Bank of England’s Financial Policy Committee. If you challenge the status quo, the govt. can introduce laws that make things hard for you. Community Energy groups know all about this – they’ve had regulations changed that made life more difficult for them. But if the issuer of UCOs is a membership organisation with a register of member-investors, the regulator has very little influence, because all members have signed up, and they’re all part-owners. Governments can ultimately do what they like, so it’s not impossible, but it’s much harder, without changing fundamental legal principles."
(https://www.lowimpact.org/categories/use-credit-obligations)