Equity, debt, freezers and TVs April 29, 2013 at 9:37 am
My freezer is like equity, my TV is like debt.
Let me explain.
There is a push from electricity suppliers to distinguish appliances that need their power now – like TVs – from those that can wait a few minutes – like freezers. We might even imagine a situation where there are two types of plug connecting to two (virtual) networks with two tarifs: an expensive, power-on-demand one; and a cheaper, give me power when you can one (with some standard over how long it could be delayed etc.) This would typically be achieved using smart devices, so my freezer would say to the network that it needed half a kilowatt hour of electricity sometime in the next ten hours, and the network would deliver it when convenient, given the total load. The plug would contain a network as well as a power connector allowing the freezer to talk to the grid.
This allows much better peak management. You can deny power from freezers in that critical five minute commercial break at half time in the cup final, giving you a better chance of boiling all those kettles.
The problem with debt is not just that it is leverage, but also that it is demand liquidity. The debt holder can demand their payment now. (Thus contingent liquidity schemes like lines of credit are like pumped storage power: they allow a solvent but illiquid party to meet peak liquidity demand.) The two tarif idea is akin to suggesting that there is a place for delayable payment but otherwise senior contracts – like sub bonds but where it is genuinely acceptable to use the deferral feature. Indeed, Islamic finance has always had such an idea, and many firms in practice treat supplier invoices that way. The nice part about the smart freezer though is that there is in some sense a negotiation between the freezer and the grid: could we imagine a similar ‘I need $1M sometime in the next two days… OK I will get it to you on Tuesday at 7.30am’ idea in finance?