Is crowdfunding the missing puzzle piece to achieve rapid decarbonization?
Adapting to climate change is commonly associated with sacrifice and reduction. People imagine a dramatic change from the status quo which often causes a psychological recoil. Rhetorically, people are quick to agree with ways to reduce their carbo n footprint although in practice their actions are not reflective of their words. Governments are equally guilty of the same inaction due to deeper socio-political and economic roots which have a vested interest in maintaining the current course. In a menacing turn for the worst, global energy-related emissions have actually risen for the first time since 2013, reaching a record high of 33.1 Gt CO2 per year(1). The sluggish actions of governments to mitigate climate change has resulted in a growing outcry from concerned citizens globally; most notably the Fridays for Future movement, founded by Greta Thunburg. The recent galvanization of millions of activists has some energy economists weighing the potential of a novel financing method which could change the public perception of climate change mitigation from sacrificial to beneficial. This revolutionary new financing channel is renewable energy crowdfunding.
Keywords: crowdfunding, renewable energy finance, democratic investing
Crowdfunding has traditionally been used for donation campaigns, early-adopter sales, and recently some equity investing on platforms such as GoFundMe, Kickstarter and AngelList. Crowdfunding works by aggregating small investments from many investors to result in a large financing round for a company or project. These platforms have rapidly scaled a significant user base, with Kickstarter as the market leader. Since its founding in 2009, Kickstarter has raised over 4.6 billion USD for over 460,000 projects from roughly 17 million users (2). In comparison, Seeds, the Collective Greenvesting financial technology platform uses an innovative repurposing of this funding mechanism to enable environmentally concerned citizens to invest and benefit from the renewable energy transition. Seeds’ unique cash flow model uses a “round-up” feature in which the user’s transactions are rounded up to the nearest Euro and the difference is automatically invested in the user’s renewable energy project of choice. ex. You buy a coffee for 1.50€, Seeds identifies this purchase and makes a separate transaction of 0.50€ which is invested into your selected project for a total of 2€ spent. These micro-investments will lower the barrier of entry so that every financial level of environmental investor can benefit from the energy transition. Users will receive a return on investment from the loan repayments from the collectively funded project. Seeds strives to connect spending with responsible saving and investing with the added social value of helping to mitigate the climate crisis. The rapid growth in global environmental activism signals that people are demanding change; Seeds plans to unleash this collective energy while distributing the profits to the masses.
2. Review of Current Renewable Energy Finance
Financing the energy transition has always been a challenge. For a long time renewable energy sources required government subsidies to be economically viable, although now economies of scale and perpetual learning have made some commercial solar and on-shore wind farms reach a levelized cost of energy price parity with conventional fossil fuels.(3) While this pivotal tipping point will signal future investment potential, this has not been the case for the past or the present. To date, the energy transition has been regrettably underfunded. According to the International Renewable Energy Agency “In the power sector, the global energy transformation would require investment of nearly USD 22.5 trillion in new renewable installed capacity through 2050. This would imply at least a doubling of annual investments compared to the current levels, from almost USD 310 billion to over USD 660 billion.” (4) In 2018, humanity was below 50% of the investment required to avert the worst consequences of climate change. This staggering statistic clearly shows that financial investment needs to either be redirected to the energy transition, or new financing channels need to be opened. This is where crowdfunding can play a pivotal role in changing the course of the energy transition.
3. Benefits of Renewable Energy Crowdfunding
To date, renewable energy crowdfunding has only accounted for a small fraction of total crowdfunding globally which is primarily centered in the Europe and the United States. Crowdfunding is primary geographically centered in developed countries with North American and Europe accounting for over 90% of the 2012 total. (5) Despite the concentrated nature of renewable energy crowdfunding, the potential is enormous. According to Bloomberg New Energy Finance, “Just 1% of current US retail investment in savings accounts, money markets and US treasuries would provide US$90 billion for clean energy crowdfunding, with 0.5% of the bond market adding a further US$190 billion.” (6) This cumulative USD$280 billion of additional renewable energy investment would eliminate 79% of the financing deficit needed to meet the most ambitious global carbon reduction goals and limit the global temperature increase to 1.5°C while avoiding the most catastrophic environmental consequences.
Besides the obvious benefit of averting climate change, renewable energy crowdfunding has the secondary benefit of distributing the profits of the energy transition to regular people as opposed to institutional investors and international banks. As an alternative to traditional funding mechanisms which are focused primarily on the financial bottom line; renewable energy crowdfunding brings the additional social benefit of community involvement and improvement. As an example, a solar installation on a local school could help reduce the electricity bills of the school, provide jobs to local electricians, distribute the loan profits to the community and help diffuse the NIMBY (“not in my backyard”) phenomenon. Additionally, projects that receive widespread community support are more likely to receive preferential treatment with respect to permitting and legal complications which can threaten to derail any project.
A more subtle benefit of renewable energy crowdfunding may actually be the most interesting facet of the financing model; democratic investing. Once a project’s financial viability is verified by the responsible crowdfunding platform, it is up to the investors to choose which projects get funded thereby promoting the projects with the largest social impact. This fascinating evolution of project finance will couple profits with the ethical implications of the project and “If this perspective proves accurate and mass production of the 20th century gives way to greater personalization in the 21st, then it is hard to see the world of finance avoiding a comparable transformation of its own. New mechanisms like crowdfunding that are disintermediated, personalized and ethical will be well poised to challenge the centralized and opaque structures of old.” (5) With the growth of renewable energy crowdfunding, the energy and financial industry are poised to make simultaneous evolutions.
4. Limitations of Crowdfunding
While the renewable energy crowdfunding financing mechanism appears to be an extremely promising option to accelerate the energy transition it is not without limitations of its own. At the moment the limit for a crowdfunding campaign in the European Union is capped at 5 million Euros (7) and in the USA it is capped at 1 million USD. (8) These limits eliminate the ability to fund projects such as utility-scale solar and offshore wind which tend to have the fastest payback rate.
Positive news for the industry is that on December 18th, 2019 the EU Parliament agreed upon comprehensive legislation to create a new investor class called the European Crowdfunding Service Provider (ECSP). Previously, “In the EU there [was] no EU-wide legislation specifically targeted at crowdfunding, although the European Commission [had] outlined its intention to monitor progress and report back on the need for further action.” (9) The fractured nature of the European Union financial regulatory system complicates the flow of international capital although now the ECSP investor passport will facilitate the ability for platforms to operate across domestic EU borders.
Finally, the inability to easily liquidate investments poses a challenge. Investments in renewable energy infrastructure tend to be medium to long-term investments of 5-20 years. This can be a significant deterrent to investors who may need to liquidate their assets in the short to medium-term. To eliminate this obstacle, some renewable energy crowdfunding sites have worked to develop a secondary market, essentially a stock market, which would allow their users to buy and sell their shares within the community. Operating a secondary market comes with significant additional financial oversight and development costs so, to date, no company has perfected this concept. The new ECSP regulation will now require all securities sold by crowdfunding platforms to be Markets in Financial Instruments Directive II (MiFID II) compliant which “is expected to increase investor protection, trust and legal certainty.” (10) MiFID II compliance will also mean that ownership of these securities will be more liquid and thus facilitate the ability to cash them out as needed. The ECSP business classification is a development, enabling crowdfunding platforms to expand their reach without needing to establish a new branch in every country they operate. This new legislation which is tentatively planned to be written into law in early 2021 will mark a new era for renewable energy crowdfunding and undoubtedly lead to new business model innovation and success for early adapters.
Just as no technology can single-handedly prevent climate change, it cannot be assumed that renewable energy crowdfunding will be the saving grace for humanity, although it could be a significant step in the right direction. Mitigating humanity’s impact on the environment will require a diverse aggregation of technologies, business models and social movements. Each of these will represent a uniquely shaped puzzle piece that helps construct the plan to save the world; crowdfunding may just be a piece that nobody expected. Preventing a climate disaster will require a dynamic evolution of human society. Crowdfunding offers an opportunity to positively reform the financial system during a time of global adaptation. If people work together and “If people take back control of their own money and invest it transparently and tangibly in the real economy, ethics can be reintroduced into financial decision-making.” (5) Using crowdfunding to build renewables creates a virtuous cycle of finance to the public will help democratize and decentralize the energy transition. With Seeds, this is a chance to grow together and give power to the people.
This paper was written in cooperation with Seeds Investing, the Collective Greenvesting platform and within the framework of the Energy Resources course at Universitat Polítecnica de Catalunya with direction from Professor Lluís Batet. Seeds was a finalist in the EPAE entrepreneurial contest and is startup founded in conjunction with ESADE Business School and the InnoEnergy Masters in Renewable Energy.
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