Month: December 2011

So we are now 4 years in to the worst recession since the 1980s, 1970s, 1930s, records began? and it seems like we are going to be stuck this way for a long time. Governments, individuals and companies around the world have racked up massive debts during the boom years, but they are now struggling to pay them back. For years central banks have targeted price stability (low inflation), but there is a growing realisation that stable prices can also mean stubborn debts, and so the previously unthinkable is now becoming a reality – that central banks pursue a higher rate of inflation in order to reduce the real value of old debts. Although the BoE have continued to state publicly that their inflation target is 2%, the reality in the UK is that we have had nearly 5% inflation (RPI) since early 2010.

The Bank of England have already created £275bn of new money through their quantitative easing programme, which they used to buy Government bonds from private banks (asset purchases). The theory is that the banks will then have more cash to lend to small businesses. The reality appears to be that banks don’t really want to lend to the sort of companies that want to borrow. If a higher rate of inflation is now palatable, could there be a more effective route to injecting cash into the economy and encourage nominal GDP growth?

If we are going to print money, I feel it should be used to purchase assets that will bring long term positive benefits to the country. I think residential solar power plants are particularly well suited to this idea, and a green quantitative easing programme could replace the existing Feed In Tariff scheme (which has nearly run out of money).

Green Quantitative Easing

£200Bn Green Easing Target: Install 10GW of residential solar plants per year, for the 8 years to 2020. 

• Use printed money to fund the installation of solar panels on the roof / open space of any household or community who wishes to participate.
• Money goes directly to businesses who install the panels, avoids the relying on the banks.
• Tangible assets with tangible benefits – homeowners would feel positive they are receiving something good (free electricity) as a result of the policy (can the same be said of normal QE?).
• Easily administered through the MCS scheme – upon successful registration of an installation, the supplier could be paid by bank transfer by the BoE.
• No additional debt for government, companies or individuals. Ownership of the panels could be retained by the BoE (with a long term lease on the roofs), giving them a real asset for their balance sheet. Free electricity would go to the household, export revenue could be collected by the BoE. Effectively the Bank would own a distributed network of green power plants, which generate an income through selling power to the grid. These could later be bundled off and sold to the private sector if that was deemed necessary.
• Helps alleviate Fuel poverty. The poorest households would get free electricity during the day to run their appliances.
• In rough terms, £200 billion would be enough to put solar panels on every house in the country (or in open spaces for shared community projects), and would give us a total installed capacity of 80GW (@ £2500 per KW). This would produce more electricity than total UK demand in the middle of the day during peak months of summer – so we would need to also invest in suitable storage techniques (batteries or running hydro power stations in reverse). The panels could be installed at a rate of 10 GW per year, which is achievable and would cost only £25 billion each year.
• We would easily meet our 2020 targets of generating 15% of power from renewable sources.
• Overall energy costs would be reduced as the huge supply of solar electricity comes online.
• The scheme would easily support around 55,000 jobs (Capacity per employee: assuming 230 working man days per year / 1.25 man days per KW installed  = 184,000 W installed per person per year. Number of jobs = 10,000,000,000 W/ 184,000 W = 54,348)

Further Reading