ENERGY FINANCE
ENERGY AS CDO
A new CDO concept can be very interesting for new energy investments. The old CDO concept is dead. The old CDO concept was packaging a bunch of loans and than slicing it in risk levels and sell these risk levels as separate products. The accounting and collecting was done by in these action specialized third party companies. Recent history has unfortunately showed that the old CDO concept has failed. Nobody wants any more to buy a box of loan parts (even with commercial issued 'insurance') when there is not much data available or accessible. The practice of the old CDO concept was that garbage was sold as gold. Some of the CDO makers/packages ware not much focussed on delivering value for money, but more on getting money for garbage (first taking the highest risk themselves as sales argument for selling the lower risk slices, and them selling the highest risk slice easy driven by the names who bought the lower risk slices. It's a shame in rating that subprime loans could get an AAA rating. It's a shame in insurance that subprime loans could get insurance against systemic failure. The old CDO concept was build on the childish believe of bankers with a average age of 30, a believe in ever growing economies without any cyclical correction. Reaganitis to the max. One more is proved that good banking also is about mixing different ages. Home prices would rise for ever, even as the speculative home ownership seriously got traction (the most simple visible sign of oversupply). The end of the US housing value growth had four roots: 1) the demand for homes slowed down during Bush (as the USA was suddenly no longer the ideal place to emigrate to and the immigration wave out of Mexico stopped), 2) rising oil prices started to drain the economic growth power of an economic model that was totally build on cheap and abundant oil of the 80ties and 90ties, growth stalled and defaults start to occur, big cars equals expensive gas refills, big houses equals big energy bill for everything, 3) the USA was living way beyond it means (credit replaced production) as economic motor and 4) China had to much man and to less women, so the women got more selective and the man had to work harder and more (more income, no time nor will to spend it) to earn female attraction. Still the CDO as technological concept of organizing accounting and collecting and then slicing in from low tot full risk slices is a perfect tool. The CDO will gain new attraction. Not in housing, but in energy. As energy investments a) stay in production (are debtor independent) and b) the outcome can be seized very simple (by sending a simple form to the grid administrator), the CDO will be born again and get bigger than ever before in the new energy sector. This time investors will be more smart and less full of trust than the first time. Trust pollution (the real reason behind the CDO boom: building a misplaced wall of trust) can be avoid by an energy investment rating model that all rating agencies will use. See Energy as Rating. The new CDO model can have any appearance. Single energy source, multi energy source, single nation, multi nation, pure interest based or with (from 0% till 100%) Energy as ROI, several type of object insurance, several types of operational insurance, several types of municipal/state guarantees, several types of demand guarantees, energy price fixed or a floating energy price or a certain combination of these two. As in energy investments the risks can be out placed to the market and there's no fuel cost price risk the real variable is not risk, but kWh selling price. The energy price based CDO delivers each slide a part of the energy price, starting a the bottom. The slice at the end will get serious ROI if the energy price gets severe higher. This is a hedge model separate from the Energy as ROI based hedge model, but with risks (that will be rewarded tremendously if the energy price gets much higher). The new Energy CDO will have huge impact. The concept of the CDO was ok. It's a pity the use it on the housing bubble. But it will rise again, and the trust pollution issue still will be a problem. That's finance: taking care of your capital and not trust easy smooth talk, nor nice presentations, not TV commercials, nor too suited too much perfumed in hit and run models thinking sales men. The CDO will become huge in fuel free energy investments. Energy as CDO is a concept capable of generating a massive energy transition investment wave.
Author: Gijs Graafland
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