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Let us assume that a country on one of the moons of Mars uses this currency called 'Sol Credits'. And 1 Sol Credits is the price of 1 MWh of power. In other words, for every 1MWh of power that your house use, you will pay 1 Sol Credits and this will never change. This power is generated through the use of solar panels, fusion reactors and sterling engines.

In a way, it is similar to how countries used to allow you to exchange your banknotes with actual gold. Except in this system, your 1 Credit can be exchanged with 1 MW of electrical power. This question is not about using electricity as currency, but using electricity to back the currency. Imagine that you can use USD1 to buy 1 gallon of crude oil, but you're not going to, it just means that if you want to, you can.

In everyday lives, you can probably use 1 cent to buy a kilogram of wheat flour. This is assuming that that 100 cents (1 sol credit) is equal to the value of importing or producing 100 kilogram of wheat.

What would happen if the cost of producing power becomes much cheaper or much more expensive after this exchange rate was established? How would the economy react to this cost increase or cost reduction of power production?

EDIT following Raditz request: As the power generator relies on solar panels and sterling engine, the power produced by these generators will fluctuate throughout the year. It will increase if Mars is near the sun and the generators face the sun. Power generation will reduce or become zero if the moon is blocked from receiving photon and heat by the mass of Mars being in between it and the sun. We are assuming that this is not far in the future (around 2030 to 2050) and the use of fusion reactors is not widespread or commonly accepted, working only as backup generator to supplement the batteries previously charged.

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  • $\begingroup$ Try to limit yourself to asking one question. $\endgroup$ – Clay Deitas Aug 26 '18 at 10:21
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    $\begingroup$ Harvesting solar energy is akin to printing money. However, there is no inflation caused by this process, because energy is used and must be replenished. Unless we devise compact "wallets" to store energy, it is better to trade with sol-credit instead. This is a digital currency. Real Energy, however, is bought with sol-credits only when needed. $\endgroup$ – Christmas Snow Aug 26 '18 at 10:49
  • $\begingroup$ @ChristmasSnow Yes, thank you for adding that. Your comment is pretty much how this currency works. $\endgroup$ – Shion Aug 26 '18 at 10:54
  • $\begingroup$ A currency "backed by" something you cannot hold in your hand isn't really backed at all. Seems more like price control/regulation. $\endgroup$ – user535733 Aug 26 '18 at 17:50
  • $\begingroup$ And if you pay for power (in megawatts), you will spend only 1 credit for endless burning of coal (at rate of a bit more than a kilogram per hour) to constantly pump 1 MW of power into the grid. $\endgroup$ – FiatLux Aug 27 '18 at 12:12
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So you have a LETS

What you are describing is a LETS: Local Exchange Trade System, where energy — either primary energy, like electricity, or buffered energy (*) — is among the goods and services being traded, and energy is being used as the price index for everything else.

A local exchange trading system (also local employment and trading system or local energy transfer system; abbreviated LETS) is a locally initiated, democratically organised, not-for-profit community enterprise that provides a community information service and records transactions of members exchanging goods and services by using locally created currency. LETS allow people to negotiate the value of their own hours or service.

So to cut the Gordian Knot: this is a real world thing already.

How would it be affected by energy being harder to produce?

This would make the price index shoot up. Since energy is harder to come by, you have to give more of other goods and services to get the same amount of energy. In brief: it would make all the prices go up.

(*) Buffered by for instance using electrolysis to split water into hydrogen and oxygen for fuel cells

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This answer is in regards to your question about power generation becoming more/less efficient.

If your power becomes cheaper to produce, the people producing the power will make a lot of money. They will trade as much electricity as possible to get as many Sol Credits as they can. They will use part of this money to invest in more solar panels.

If power becomes harder to create, such as smog development that blocks solar panels, either the people who generate power will go bankrupt and the electricity side of the currency will collapse, or people will have to get less power for the same amount of credits.

I think it is a bit unreasonable to say that people will always get the same amount of power for 1 Sol Credit if the amount of electricity available fluctuates. In your story, you treat electricity as a separate currency that can be traded with Sol Credits. On Earth, we have exchange rates for currencies because their relative values fluctuate with the economy.

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  • $\begingroup$ I mean it in the same way as how countries used to back their currency with gold. And 1 dollar for example can get you like 5 grams of gold (example) and this will never change. Just like the price and value of power in this case, the currency can be more valuable or less valuable based on the value of its backing. Similarly, if a Saudi Riyal is backed only by crude oil, the value of their Riyal may become more or less valuable based on the price and supply of crude oil. $\endgroup$ – Shion Aug 27 '18 at 9:45
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I would simply assume that the value of a Sol Credit would be proportional to how much power you have and are generating. I'm not sure how it works right now with the American Dollar backed by Oil but I can dream.

Basically as more power is available, the value of a Sol Credit lowers and less power means the value of a Sol Credit is higher. The reason I say this is because power is a critical component of any developed city. It powers literally everything you have and its going to keep you alive (depending on your atmosphere). So if power is rare, people are willing to trade more things for it and its value goes up and when there is plenty of power, its value drops because people know there is a surplus and traders will want to move power off their grids/storage and generate income, rather than holding it back (well atleast some money savy person will drop their price, and once they do it everyone will).

Another way to look at it would be to compare it to the fallout series and the value of bottlecaps. The value of a bottle cap was decided to be 1, because the people who could generate clean water decided they wanted to. They backed the price using an essential need, so suddenly everyone had to use it because it was required if you wanted to live.

In terms of actual processing, people will always be trying to expand how much power they can generate. A solar panel is basically free power right? But as more and more people generate power, the value of a single Sol Credit or 1MWh drops. This means everything is basically going to cost more and more money. Eventually the value of a single Sol Credit is too low to be profitable unless you have already invested a large sum of money into it and are able to generate and store a considerable amount of volume.

You could kind of see this sort of investment and money generation happen with bitcoin and ethereium. There was an initial investment into equipment by many people when it was profitable. As more and more was generated and more was available, the value dropped because people wanted to move their bitcoins that they mined rather than hold onto it. People undercut other people, people sold all their bitcoins they stored, etc etc and the price comes down. Now if you want to invest into it, you realise you need a lot of capitol to make a profit. The value of bitcoin has dropped so much that you only make returns on initial investments after several months. People who have already invested and have paid off the inital cost still find it profitable. They can increase their farms because their profit covers the setup cost and do so at a steady pace. They make enough to factor into maintenance and large corporations who farm the coin can do this so efficiently that no normal person can keep up. Eventually the value will settle down, with only minor fluctuations due to changes in production, demand, security, etc, etc.

I'm ignoring a large section of the reason crypto increased so fast, but basically if you say 1MWh is worth 1 Sol Credit, the value of a Sol Credit will fluctuate until it reaches a steady state. It will be profitable for big organizations but not small ones or individuals because the startup cost to make a profit would be incredibly high because people would undercut each other to shift the power they are making and get returns. So at the start 1 Sol Credit might be worth 1 piece of bread, but when it settles it could be 100 Sol Credits for 1 piece of bread or 1000 Sol Credits for 1 piece of bread due to it being necessary, a sudden surge as everyone tried, a large drop as competitive pricing drove the value down and then a increase when small players dropped out followed by a steady state where only the big players are left.

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