Financial Environmentalism

A lot of the content of this blog has operated at the point of intersection between environmentalism and finance.

Rather than some grand philosophy, the charge of financial environmentalism will be simply this:

  • to identify the ways in which a change of process or capital investment may yield upwards of 10% return on investment, and
  • then to communicate these changes or investments.

The amount 10% has been randomly selected. There is no reason for this other than it is a suitably round number. Being well above the long term government bond rate, it accounts for some level of risk and miscalculation. And at a double digit figure, it should be of sufficient interest to even a layperson investor, regardless of alternate opportunities, most of which will comprise indebted property accumulation.

10% is also a point where various forms of finance can be contemplated. This presents the opportunity for scalable environmental innovation to be adapted more rapidly.

The reason for the second criterion is due to the exigency of the climate crisis, which can really only be fixed slowly.

10%+ ROI – the Holy Grail of solar panels?

Is managing a solar power installation to the point where it generates upwards of 10% return on investment the Holy Grail of solar power adoption? At that point the standard solar power installation would go from being something of an economic joke to becoming a worthwhile and in fact wise proposition for many NZ households.

But managing an installation to this point is not easy, and the claims involve assumptions. For that reason, my claims need to be fairly clinically examined.

To start with, I begin from the position that the solar power system in question will already be reducing net energy drawn from the grid by an average of 2.4 kWh per day. Given that a 1.5 kW system in my neighbourhood will generate on average of 5.4 kWh per day, this is not too much of a stretch – but it won’t be the case for every household. Most people who buy solar assume that every Wh that gets generated will get used, but it is often not the case. In fact, learning that the power generation needs to match power usage can be one of the most disenchanting things about investing in solar power, particularly given the variance between generation and usage during summer and winter months in the far southern hemisphere.

If so, a 2.4 kWh offset would work out to around a 4.4% return on investment on a $6000 system. Not good, but realistic.

This picture all changes with active management of the solar panels. With active management, you notice when the days of surplus occur, and plan ahead to intensify your energy usage on these dates. The best example is reserving the process of managing a weekly batch cook on the day of the greatest sunlight and then storing and reheating meals in a microwave throughout the week. This means you intensify your usage during daylight hours on one day in order to minimise usage on other more overcast days.

An example of this might be where a sunny day produces 7.4 kWh and you end up using 7 kWh of it for batch cooking. During the batch cook you end up making 14 servings at an energy cost per serving of 0.5 kWh.

A simple way of looking at that is that just an average of 1 kWh extra per day has been saved. But I would argue this does not reflect the true saving to the household. During a batch cook, you will often have three things on the go in the oven at once. This leads to efficiencies that are not reflected in the direct drawing from the power generated.

The real way to look at this is the average energy saving per serving per week under normal conditions, compared to the reduced cost of batch cooking and reheating meals.

A typical meal involves several different components separately prepared. There is often a ‘greens’ component, a ‘meat’ component and a ‘staple’ component. Each of these has an energy cost to produce. The energy cost can range depending on the meal, but it is not unusual for a single meal to ‘cost’ between 4 and 5 kWh. While a typical meal may make two serves, one for the meal and one for leftovers, this still results in between 2 and 2.5 kWh per serve. (I’m working the math from the perspective of a one person household, but the same principles apply for larger households. In fact my father visits me several days of the week, making it a two person household on those days, and at work I just make a salad, so it all evens out to 14 serves per week regardless.)

This energy will often be used in the early to mid evening, when there is peak energy use and solar is not often available.

Multiply that across 14 weekly serves and you have cut an extra 28 to 35 kWh from weekly consumption.

Even at the lower end of the spectrum, when added to the original 16.8 kWh, this would add up to a total of 44.8 kWh saved. At $0.262 + GST per kWh, this would add up to over $700 per year saved in direct electricity costs. This is without even including the cost of future retail energy price inflation, which I have at around 3.11% per annum. On a $6000 system, this works out to a return on investment of 11.7%. The efficiency here is achieved not so much through the panels themselves, but through the process of batch cooking – having an oven running at 170 degrees containing 3 separate dishes instead of 1 is far more efficient than cooking each meal steadily one at a time.

This does assume, however, that the cooking processes can be consistently managed. One reality that many families will have to face is that you may not always find a sunny day in the weekend to do a batch cook, and resources to do batch cooks during the working week may be scarce.

Next, you must consider the impact of microwaving the defrosted meals. A 1 kW microwave should consume 100 Wh per 6 minutes, and 6 minutes is usually sufficient to microwave most servings provided they have had overnight defrosting. This would result in 12 serves x 100 Wh, or 1.2 kWh, assuming that two of the serves are consumed on batch cook day. This would reduce weekly energy savings at the lower end from 44.8 kWh down to 43.6 kWh per week.

Also, while my batch cooks to date have been fairly efficient at drawing available solar energy, there is quite often an unavoidable overage. The exact amount drawn from the grid by an electric oven set at a certain temperature cannot be controlled. As a result, quite often I end up drawing a net of 2.6 kWh from the grid for the batch cook. For integrity’s sake, it makes sense to deduct this overage from the weekly savings figure, bringing it down to 41 kWh per week.

There is the other issue that solar panels will gradually degrade in efficiency over 20 years, and dates of peak consumption will be most heavily affected. However, this is most often offset by the increase in the cost per unit of energy caused by inflation.

Even with these adjustments, I have it that a 1.5 kW system used in such a way can easily result in an annual saving of $642.37 inc GST. Assuming installation costs of $6000, this still results in an annual return on investment of 10.7% even before taking into account inflation.

So – it’s a lot of work – but you can make a set of solar panels achieve over 10% return on investment. Although the improved return on investment should not be viewed as a product of the panels themselves, but as a process of active management of facilities that looks at restructuring the household’s energy use around solar panels plus other available equipment, such as a freezer and microwave.

The moral hazard machine

It seems unbelievable now, but the history of the era of quantitative easing only dates back 13 years.

The concept was first applied in the wake of the global financial crisis. Policy makers facing systemic collapse decided to pull this unlikely rabbit out of a hat.

One commentator at the time (Warren Buffett) said that QE would give rise to ‘moral hazard’. People who stuffed up with debt and lending would avoid the noose and live to fight another day without ever learning their lessons.

Yet QE ‘worked’ in pulling economies out of the doldrums, with no noticeable inflationary impact.

It is hard to make sense of this era. Beyond the simple prosperity that resulted, there is an odd underlying feeling that basic justice was somehow skewed and basic wisdom somehow invalidated, and that macroeconomic firefighting was somehow secretly responsible.

What ought to have resulted in traumatic lessons in the true cost of debt led to nothing, and people quickly reverted to their habits of borrowing to buy houses, the Main Street flawed ideology that led to 2008 to begin with.

Little did we know that we were simply kicking the can down the road.

The flawed ideology has resulted in the creation of millions of moral hazard machines, including the biggest one ever, Evergrande.

NZ real estate investor interest deductibility and the future

There’s a reason why I’ve stayed out of the residential real estate investment sector, other than not having the money for a deposit. I’ve long since thought that runaway capital gains would result in a bright red target being painted on investors’ backs, which would eventually translate into policy and specifically what has resulted in NZ is the elimination of the ability to claim an interest expense as a deduction for real estate investment.

While they failed to implement the capital gains tax, the government has put into law a cancellation of deductions on interest for residential investment property purchased after 27 March 2021, excluding the family home and new builds, which came into effect on 1 October 2021.

My main concern for this is that in an environment of rising inflation, and hence, eventually, rising interest rates, eliminating the right for investors to claim interest deductibility may have a compound effect which is hard for the markets to price.

As significant as it is to remove interest deductibility in the current low interest rate environment, it will be significantly more punishing once interest rates start to go up. To have a growing, non-deductible expense attached to marginally profitable asset could easily add velocity to an asset price downturn. And if a downturn does occur on the back of this, it could dampen the chances of a swift recovery for so long as interest rates remain high.

This is particularly a problem when we have no way of knowing where interest rates will sit in five years’ time.

As it stands, I just can’t see how investment properties can be valued.

How Friedrich Hayek predicted Evergrande

‘Prediction’ may be a strong word, but I need a catchy title to catch clickbaits. What I really mean by the above is that the dire state of the Chinese residential real estate market was totally foreseeable using textbook Austrian Business Cycle Theory.

ABCT holds that there are consequences to having a central bank fool around with interest rates, and that artificially lowered interest rates would give rise to ‘mispricings’ from seasoned and professional capital investors, which in turn will accelerate the boom-bust cycles in the economy.

For many decades Hayek was essentially written off – this was because early studies into the decision-making surrounding the purchase of capital assets contra-indicated his economic theories. Studies that followed the investment decisions and investment consequences of seasoned financial officers purchasing capital machinery for their businesses indicated that there was no significant consequence to fluctuating interest rates.

Anyone who has ever worked with capital assets in a business context can explain why this was. Some of these machines could improve the productivity of a factory by 120%. If a baker procured an oven on finance that led to a round of baking producing 88 units instead of 40, it was a no-brainer for the business and didn’t matter substantially whether the lease came in at 8% or 9%.

But the people who studied Hayek hadn’t seen anything yet. There is simply no comparison between the sagacity of industry-specific financial officers who know their trade and the dumbness of residential real estate buyers. The reason early studies reviewing Hayek overlooked this was because the advent of households themselves becoming the key asset of households gave rise to a new class of professional asset mispricer, driven more by a glut of emotions including greed and fear of missing out rather than even the most rudimentary back of napkin math.

And I am not for one second knocking the Chinese. This is a worldwide phenomenon. The extent of the behaviour across cultures shows how valid the theory is. In particular, the fact that 20% of Evergrande’s residential real estate portfolio now sits dormant and unoccupied points to another conclusion of Hayek’s found in the closing pages of ‘Prices and Production’ – that prolonged lowering of interest rates would lead to the oversupply of capital assets, resulting in a glut in the market, with the eventual outcome given being deflation, not inflation.

How the property price jump is easily explainable using back of napkin maths

One of the first things I learned about when learning the stock market was the discounted cash flow method. For those too lazy to look it up, I’m not going to explain what this is. For the purposes of this article, the only thing that interests me is the relationship between the discount rate and net present value.

I have the dubious advantage of having built various spreadsheet calculators to help me calculate NPV. I’ve applied these spreadsheets to everything from individual stocks to specific properties to solar panels to get a picture on the net present value of different assets within different asset classes. Yes, I do this for a hobby.

It’s only once you’ve built and fooled around with these sorts of calculators that you can see the dangers of certain types of macroeconomic policy.

The interesting thing is that the discount rate is never really consistently defined. Certain people will use a risk-adjusted rate, whereas Warren Buffett will simply use the long term government bond rate.

In other words, being the words of Admiral Akbar, ‘It’s a Trap!’ If it stands to reason that a drop in the discount rate leads to assets with a fairly minimal cashflow adding half a million dollars to their valuations, then it also stands to reason that even a slight, slight increase in the discount rate will lead to the price collapse of many of those assets.

Having said that, I’ve always been a cynic on the housing market, being a Hayekian, and this is perhaps the continuation of a long-held and fairly-wrongheaded (according to recent data anyway) set of postulations.

Batch cooking and the automatic fast

One of the great strengths of the slow carb keto diet that I am currently on is that for the first time in my life, I have actually been able to fast successfully. In the past, many of my attempts at fasting have resulted in rapid drops in blood sugar, in turn leading to a partial loss of vision that has cost me the better part of the day.

Now that I have successfully adapted to the slow carb keto diet, this is no longer such a problem. While fasting is still occasionally difficult, I can make it through the day with a reduced food intake.

The slow carb keto diet has also led to a reduction in the total number of meals I take per week. From having three square meals a day, I have shot down to just two meals, lunch and dinner, with the obligatory butter-coffee in the morning to get me started.

In the spirit of one thing leading to another, it came as quite a surprise to find that I had reached the end of a batch cooking day and had managed a successful fast. One would think that being in front of food all day would have tempted one to hunger – but no, the concentration and rapid motions involved in batch cooking a week’s worth of meals led to a fast that happened virtually automatically.

I love to tease out the subtle benefits of things, and this particular benefit is as perverse and as subtle as it gets. The health benefits of fasting are well-reported, and while I never set out with this objective, it neatly folds into the nexus of keto-solar-batch cook activities that seem to be absorbing a chunk of my weekend.

10%+ ROI – the Holy Grail of solar panels?

Is managing a solar power installation to the point where it generates upwards of 10% return on investment the Holy Grail of solar power adoption? At that point the standard solar power installation would go from being something of an economic joke to becoming a worthwhile and in fact wise proposition for many NZ households.

But managing an installation to this point is not easy, and the claims involve assumptions. For that reason, my claims need to be fairly carefully examined.

To start with, I begin from the position that the solar power system in question will already be reducing net energy drawn from the grid by an average of 2.4 kWh per day. Given that a 1.5 kW system in my neighbourhood will generate on average of 5.4 kWh per day, this is not too much of a stretch – but it won’t be the case for every household. Most people who buy solar assume that every Wh that gets generated will get used, but it is often not the case. In fact, learning that the power generation needs to match power usage can be one of the most disenchanting things about investing in solar power, particularly given the variance between generation and usage during summer and winter months in the far southern hemisphere.

If so, a 2.4 kWh offset would work out to around a 4.4% return on investment on a $6000 system. Not good, but realistic.

This picture all changes with active management of the solar panels. With active management, you notice when the days of surplus occur, and plan ahead to intensify your energy usage on these dates. The best example is reserving the process of managing a weekly batch cook on the day of the greatest sunlight and then storing and reheating meals in a microwave throughout the week. This means you intensify your usage during daylight hours on one day in order to minimise usage on other more overcast days.

An example of this might be where a sunny day produces 7.4 kWh and you end up using 7 kWh of it for batch cooking. During the batch cook you end up making 14 servings at an energy cost per serving of 0.5 kWh (or effectively nearly 0 kWh per serving, since it all came from the sun).

A simple way of looking at that is that just an average of 1 kWh extra per day has been saved. But I would argue this does not reflect the true saving to the household. During a batch cook, you will often have three things on the go in the oven at once. This leads to efficiencies that are not reflected in the direct drawing from the power generated.

The real way to look at this is the average energy saving per serving per week under normal conditions, compared to the reduced cost of batch cooking and reheating meals.

A typical meal involves several different components separately prepared. There is often a ‘greens’ component, a ‘meat’ component and a ‘staple’ component. Each of these has an energy cost to produce. The energy cost can range depending on the meal, but it is not unusual for a single meal to ‘cost’ between 4 and 5 kWh. While a typical meal may make two serves, one for the meal and one for leftovers, this still results in between 2 and 2.5 kWh per serve. (I’m working the math from the perspective of a one person household, but the same principles apply for larger households. In fact my father visits me several days of the week, making it a two person household on those days, and at work I just make a salad, so it all evens out to 14 serves per week regardless.)

This energy will often be used in the early to mid evening, when there is peak energy use and solar is not often available.

Multiply that across 14 weekly serves and you have cut an extra 28 to 35 kWh from weekly consumption.

Even at the lower end of the spectrum, when added to the original 16.8 kWh, this would add up to a total of 44.8 kWh saved. At $0.262 + GST per kWh, this would add up to over $700 per year saved in direct electricity costs. This is without even including the cost of future retail energy price inflation, which I have at around 3.11% per annum. On a $6000 system, this works out to a return on investment of 11.7%. The efficiency here is achieved not so much through the panels themselves, but through the process of batch cooking – having an oven running at 170 degrees containing 3 separate dishes instead of 1 is far more efficient than cooking each meal steadily one at a time.

This does assume, however, that the cooking processes can be consistently managed. One reality that many families will have to face is that you may not always find a sunny day in the weekend to do a batch cook, and resources to do batch cooks during the working week may be scarce.

Next, you must consider the impact of microwaving the defrosted meals. A 1 kW microwave should consume 100 Wh per 6 minutes, and 6 minutes is usually sufficient to microwave most servings provided they have had overnight defrosting. This would result in 12 serves x 100 Wh, or 1.2 kWh, assuming that two of the serves are consumed on batch cook day. This would reduce weekly energy savings at the lower end from 44.8 kWh down to 43.6 kWh per week.

Also, while my batch cooks to date have been fairly efficient at drawing available solar energy, there is quite often an unavoidable overage. The exact amount drawn from the grid by an electric oven set at a certain temperature cannot be controlled. As a result, quite often I end up drawing a net of 2.6 kWh from the grid for the batch cook. For integrity’s sake, it makes sense to deduct this overage from the weekly savings figure, bringing it down to 41 kWh per week.

There is the other issue that solar panels will gradually degrade in efficiency over 20 years, and dates of peak consumption will be most heavily affected. However, this is most often offset by the increase in the cost per unit of energy caused by inflation.

Even with these adjustments, I have it that a 1.5 kW system used in such a way can easily result in an annual saving of $642.37 inc GST. Assuming installation costs of $6000, this still results in an annual return on investment of 10.7% even before taking into account inflation.

So – it’s a lot of work – but you can make a set of solar panels achieve over 10% return on investment. Although the improved return on investment should not be viewed as a product of the panels themselves, but as a process of active management of facilities that looks at restructuring the household’s energy use around solar panels plus other available equipment, such as a freezer and microwave.

The Gantt Chart told me I should have soaked the beans

Nobody lies in the bathtub at 5.50am reading management theory textbooks. Nobody, that is, but me.

A recent management theory textbook introduced me to the concept of the Gantt Chart. It definitely did not leap out at me as revolutionary. It was the sort of thing that anybody with a modicum of organisational skills would look at and go ‘ho-hum, so this is what they are passing off as management to justify the price of an MBA qualification.’

The magic came when I started applying this newly discovered (for me, anyway) methodology to my recently avowed process of organising weekly batch cooks during peak sunshine hours so as to maximise the return on investment from my solar panels.

Batch cooking for a week is not a simple process. I envy the soulful spirits who have been organised enough to do this for years. There are a lot of logistics involved. Logistics and a degree of jeopardy.

It adds an extra stage to your organisation that often reveals, and in this case did reveal, the gaps and deficiencies in the planning process.

The Gantt Chart is organised along two dimensions – on the x axis, the list of tasks to compete, thoroughly broken down. On the y axis, you include the resource limitations, most notably time. The Gantt Chart will force you to think through each of the stages that need to be completed, and the time allocation to each, as well as the points where the various tasks need to overlap. The Gantt Chart eliminates the demotivational complexes that flow from simple disorganisation and project cluttering. It uninhibits motivation.

It can reveal the exposure of tasks to resource limitations beyond the resource of time. For instance, in my kitchen I have a cast iron skillet, a Dutch oven, some trays for baking. I also have only three (yes, I know) functional elements on my stove top and limited shelf space and height in my oven.

The steps to arrive at a proper Gantt Chart are equally important. Any fool can write a shopping list. And just about anyone can list out a sequence of activities and then map them from first to last. It’s what happens when you list out these items, then attach them to a particular time use or resource, that you can begin to see where the gaps lay in your planning.

You think you’ve got it all mapped out. You think you’ve included every last item on your list. Believe me, you haven’t. Particularly with cooking. When I went through and attached every cooking and reading stage to a particular 15 minute time slot, I realised: I hadn’t soaked the beans.

These are black-eyed beans and rajma beans we are talking about. Basically, the most incendiary of beans for delicate digestive systems. What was perhaps worse, the recipe for black-eyed beans is to boil them, then let them sit for a full hour, before draining and rinsing and recooking. I hadn’t allowed time to let them sit.

The great thing about the Gantt Chart is it allows you to see in advance just how best laid your best laid plans really are.

Apart from that little disaster, however, the batch cook was a resounding success. The Gantt Chart enabled me to map out the entire day of cooking and food production, tying the most energy intensive processes to the peak sunshine hours. It even led me to totally reorder the day for maximum energy efficiency, as the task I had left until last was the biggest solar guzzler, and when I saw it I realised I had to go back to the drawing board.

They say little about Gantt Charts in your classic Jamie Oliver cookbook. But every kitchen should have one.

More for my own use (I do not expect anyone to ever download an actual Gantt Chart from my blog), I have included the Gantt Chart that I used today as a template spreadsheet which can easily be customised to a billion different occupations, only some of which need apply to dramatically reducing household energy consumption and increasing the ROI of solar panels.

A Review Summary of Chapter 3 of ‘The Ten Day MBA’

I expected this chapter would be either a snooze or a chore – having read accounting principles since I started learning about business, and having been through 1500 of 2200 ASX-listed small cap companies, I’ve read and interpreted more financial statements than some people have had hot dinners. But I found this chapter to be the most enlightening chapter in the book, and perhaps the only one I will review, because it yielded a simple insight.

The chapter starts out with the simple A = L + OE equation, then dovetails into financial ratios. The point is quickly established that while a CPA would follow a process to create accurate financial statements, an MBA’s skill is to use financial statements to understand the story that is being told. An example is given of a statement of cashflows, and the reader is then asked to read the financial statements to determine whether the business is living or dying. In other words, to interpret the financial data to determine what is really going on.

I have always thought financial ratios were a bit of a chore. While some ratios such as return on equity made perfect sense to me, were easy to figure out and were highly useful once applied, I never really understood the need for calculating asset turnover per period, or return on sales.

But what became clear to me through reading this chapter was that the life or death of a business is foreshadowed by the change in financial ratios.

It’s the way that the individual ratios change over time that is the best indicator of good management. One needs to calculate the ratios not just at one snapshot, but to view them across multiple sequential snapshots, in order to divine whether management and market conditions are determining success.

This goes to the heart of what I was actually trying to achieve by reading a book like this: is an MBA worthwhile? If I study an MBA, what will it teach me?

Good management effects a positive change in select financial ratios. That is the purpose of MBA training. That is what business administration actually hopes to achieve.