Renewable Energy Review: Finance Mechanisms

Developers, manufacturers, investors and other renewable energy industry stakeholders need updates on the latest and greatest finance mechanisms available today. Since 2003, global consultancy Ernst & Young has released its Country Attractiveness Indices, which ranks global renewable energy markets by analyzing investment strategies and resource availability.

The indices are updated on a quarterly basis and the most recent report can be found here.

From Micro to Mainstream?

With estimates putting total crowdfunding across all sectors at just over US$5 billion in 2013, compared with more than US$255 billion new investment in clean energy alone in the same period, it’s easy to see why “microfinance” business models are often perceived as merely a footnote to the global energy transformation and a parochial funding vehicle for the environmentally conscious investor. In short, there is no escaping the fact that retail investment and community-led funding currently contribute only a small fraction of the global investment volumes.

Yet, faced with the startling reality that more than 1.3 billion people worldwide still have limited or no access to electricity, perhaps we should not be trivializing any contribution toward the estimated US$1t of investment required to achieve universal energy access by 2030. Factor in a surging population of potential energy consumers even beyond 2030 and the scale of the challenge becomes even greater. An even more intriguing thought is therefore whether consumer-led (or consumer-inspired) microfinance, far from being simply a footnote, is in fact becoming a significant narrative in the next chapter of the global energy revolution.

Small Goes Large

With grid and policy challenges in more mature markets making the build-out of large scale generating assets more difficult, and emerging markets finding themselves both desperate for energy yet also unencumbered by traditional centralized transmission infrastructure, localized and off-grid energy solutions are creating the necessity, and therefore the opportunity, for new finance models that can accommodate a large number of smaller projects. Far from being simply another source of capital therefore, microfinance may well have a role to play in financing deals that would otherwise not get done. 

Yet the scale of the opportunity is far from small. Global distributed solar capacity is forecast to increase by 184 GW between 2014 and 2020, requiring more than US$430 billion of investment (see Figure 1 below). Microgrid deployment is forecast to become a US$40b global business annually by 2020, and IRENA expects renewable energy capacity in Africa alone to quadruple to 120 GW by 2030 if investors dedicate “substantial flows” of funds to the region. Still parochial? Perhaps not.

A Savvy Investment Model

Crowdfunding is not a new concept. However, the potential application to the renewables sector will likely challenge the scalability and geographic mobility of crowdfunding vehicles. Critically though, it is no longer just the remit of the “socially conscious” investor — it is now a smart investment vehicle offering similar and often higher yields than many other retail investment alternatives. 

Analysis undertaken in 2012 by BNEF, in the midst of the economic recovery, indicated that U.S. retail investors held almost US$9 trillion in treasuries, savings bonds, money market funds and saving deposits. While crowdfunding does not yet match the low risk profile of such investments and is therefore not necessarily a directly competing alternative for retail funds at present, global and country-level efforts to increase investor protection and reduce risks are well underway. Given the anticipated accelerated growth of crowdfunding as an investment vehicle, with total global investment expected to double to US$10 billion in 2014 alone, its risk profile may well be reduced significantly in the coming years, taking it closer to these traditionally safe investment channels. 

Should this happen, redirecting even 1 percent of this US$9 trillion pool of retail capital toward clean energy investments via comparable yield crowdfunding platforms could inject more than US$90 billion into the sector. Just 0.5 percent of the bond market would yield an additional US$190 billion of capital. Targeted policies can also help to position crowdfunding as an increasingly savvy investment model. Recent reforms in the U.K. for example, will enable savers to benefit from tax-free returns on peer-to-peer lending by permitting these investments to be held within individual savings accounts (ISAs), which analysts indicate could generate more than £6 billion (US$10 billion) for the crowdfunding market. 

Taking Its Share

The renewables sector should therefore be leveraging its potential for long-term stable yields to attract a greater proportion of this increasingly liquid retail capital market. SolarCity, the largest solar power provider in the U.S., estimates that rooftop solar alone will attract more than US$5 billion from crowdfunding within five years, more than 50 times the amount raised to date.

But it’s not just investors that stand to gain from the crowdfunding phenomenon. For businesses, it can provide affordable and attainable funding at a time when venture and seed capital to support technology or business model innovations are limited. Crowd-sourced finance can be more risk tolerant, with other social or environmental motivations often influencing the value proposition. It can also produce repeat investors and raise finance more quickly. In late 2013, for example, Windcentrale raised €1.3 billion (US$1.7 billion) in just 13 hours by selling shares in a 2-MW wind turbine to over 1,700 Dutch households.

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Perils for the Masses

Crowdfunding still faces a number of significant barriers, however, not least the risk of fraud or cyber attack given the typical web-based model. Other challenges include the difficulty of standardizing the investment process, potentially high due diligence costs, the need for credit enhancement products to boost investor protection and a secondary market to increase asset liquidity.

Legislation also remains ambiguous across most markets, although specific regulations are being developed in the U.K., China and India to name just a few. In the U.S., financial returns from crowdfunding are currently prohibited in most states, necessitating alternative payback models such as utility bill discounts. However, amendments to the U.S. Jumpstart Our Business Startups (JOBS) Act, expected to be formally issued later this year, will permit businesses to provide a return on investment for projects of up to US$1 million and allow an unlimited number of unaccredited investors without SEC registration to invest. This is expected to significantly boost the potential of US crowdfunding, though it does also bring with it concerns over both the protection of, and from, naïve or unsophisticated investors participating in deals that are assuredly less secure than, for example, treasury bills.

Blazing the Trail

Notwithstanding the challenges, there are companies already successfully generating millions of dollars to boost clean energy deployment. US-based Mosaic, Inc. is one of the pioneers in this space, offering a typical rate of return of 4.5 percent to 7.0 percent for solar investments as small as US$25, with loans paid back over 10 years. In March, Mosaic launched its peer-to-peer platform allowing financing of residential solar as well as commercial projects. 

In the U.K., renewables platforms such as Abundance Generation and Trillion Fund predict returns of up to 9 percent for some projects. Abundance is the only U.K. crowdfunding platform to be regulated by the Financial Services Authority and is the first to use debentures as an investment vehicle. While the average project size is currently around £500,000 (US$830,000) it hopes to increase this to £1 million to £4 million (US$2 to US$7 million), and eventually up to £10 million (US$17 million). Trillion Fund, meanwhile, aims to be owned by the crowd itself within three years, when it hopes to be providing US$100 million of financing to the market annually. 

Emerging from the Crowd

Unsurprisingly, crowdfunding is also penetrating emerging markets, where distributed solar power in particular is having a significant impact. US-based SunFunder aims to raise US$1 billion for projects across Africa, Asia and Latin America by 2020, and is already close to half way with a 100 percent repayment rate to date. While the company is using crowdfunding to prove the sector is bankable, it’s also seeking to make off-grid solar projects more attractive for larger private investors. Meanwhile, Milaap, a domestic Indian crowdfunder has disbursed almost US$2 billion of funds to individuals and small business enterprises across the country, a large proportion of which are energy initiatives.

Community Considerations

While crowdfunding has hit the headlines as an emerging phenomenon for clean energy financing, the broader concept of community ownership should also not be ignored. While not always necessarily driven by returns or restricted to third-party funding platforms, it is no less critical a driver in contributing to the global energy transition. Community-led ventures, whether wholly funded by the communities themselves or in collaboration with other investors (including crowdfunding platforms and socially responsible “impact investors”), are helping to engender changes in behavior and move the debate away from whether to install a single turbine, to how to deal with energy security at a local or regional level. Consumers are becoming more empowered to take control of their own energy supply and demand, and as a result, are also becoming increasingly motivated, and empowered, investors.

Setting a Precedent

And for those tempted to dismiss community-led initiatives as niche or piecemeal, one need only look to Europe, where more people are invested in cooperatives than in the stock market. Germany and Denmark have demonstrated that citizen participation and regional value creation from decentralized renewable energy production can be the norm, not the exception. In Germany, there are more than 600 energy cooperatives and more than half of renewables capacity is community-owned, while in Denmark, over 100 wind turbine cooperatives have a combined ownership of three-quarters of the country’s turbines.

In the U.K., where community-led renewables has historically had less traction, energy cooperatives are increasingly seen as a way to challenge the monopoly of the “big six” utilities, with one local authority making a €1.2 billion (US$1.6 billion) revolving loan available to support local renewables projects. Organizations such as Energy4All, formed to support multiple cooperatives and help raise more than £25 million (US$52 million) through public share offers, are also valuable vehicles for pooling knowledge and resources across communities.

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At a regional level, the recent announcement that more than €38 billion (US$51 billion) of EU Cohesion Funds will be available between 2014 and 2020 to support the shift to a more environmentally friendly economy, also provides a substantial pool of capital for community projects to tap into.

Competitive Innovation

While there are fewer instances of communities funding projects themselves in emerging markets, the concept of community power is still galvanizing new business and financing models with the potential to attract investors and developers of all shapes and sizes. Companies like Simpa Networks, for example, are evolving the solar leasing model popular in the U.S. to bring low-income communities in India solar systems by requiring customers to make only a small initial down payment for the system and then pre-pay for the energy service, activated via a mobile phone. Each energy payment then also contributes toward the final purchase price of the system. Elsewhere, 10 clean energy projects developed by West African companies and entrepreneurs representing more than US$80 million of investments were presented to investors at the West Africa Forum for Clean Energy Financing in late 2013 as part of a business innovation competition.

Making Connections 

Perhaps one of the most interesting and potentially transformative models for leveraging and creating community power that is both bankable and scalable can be illustrated by a joint initiative between Bharti Infratel, India’s largest mobile phone provider, and OMC Power. The venture sees Bharti’s off-grid radio tower base stations acting as ”anchor clients” that purchase the majority of the power output from small-scale renewable installations run by OMC, with excess power then sold to local communities via mini-grids, transportable batteries, or by directly charging applications (such as phones) on site.

The guaranteed revenue from the telecoms provider makes the project bankable, while the direct energy supply reduces the company’s power bills, helps keep customers’ phones charged and electrifies rural communities. While the telecoms industry represents a perfect fit for such a model, its potential is more far-reaching, with most industries likely to benefit directly or indirectly from communities — in essence their potential consumer base — having increased access to cost-effective power. Further, with such business models, it is entirely feasible that the need for anchor clients will diminish, with community and individual power offtake driving the economics of the business.

The Power of Power

This affordable power has the ability to transform peoples’ lives, and in turn transform whole economies, boosting economic growth, creating jobs and galvanizing further demand for energy – a self-reinforcing cycle. And with emerging economies in a unique position to leapfrog traditional infrastructure and more mature markets facing grid challenges and site saturation, it is becoming increasingly clear that small- to medium-scale energy projects led or inspired by communities and retail investors will play a critical role in shaping our future energy mix and creating the stimulus for new funding models to emerge.

It seems getting people to part with their savings and invest is not the barrier, nor is there lack of appetite for innovative business models. But the sector does need to be more proactive in ensuring clean energy initiatives become the obvious destination of choice for this crowd-sourced or community-sourced capital, as well as helping to address the broader microfinance challenges. It’s no longer just about contributing to global clean energy investment, it is also about financing the deals that otherwise wouldn’t get done.