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Crowdfunding and the Energy Sector

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Crowdfunding and the Energy Sector August 2015 Exchange Issue 18 Crowdfunding and the Energy Sector Guest Author: Dr. Chiara Candelise Research Fellow, IEFE, Bocconi University, Milan [email protected] 1 Introduction The lack of access to credit and other financial services is of access to capital beyond traditional financial systems. increasingly recognized as one of the biggest obstacles to socio-economic development and poverty reduction. At the same time, liberalization in the energy markets and Despite universal financial access has been increasing climate change mitigation policies have been driving a worldwide (e.g. the number of adults with a bank account paradigm shift in the energy systems toward cleaner and has risen from 51% in 2011 to 62% in 2014), full financial more distributed energy generation. This has triggered, inclusion, i.e. access to a range of quality financial services on one hand, the need for further investments in energy at affordable prices, is still lagging behind (e.g. millions of assets and, on the other hand, a quite radical change bank accounts are dormant or used for narrow purposes in the role of energy consumers, leading the way to such as receiving salary) (Kelly and Rhyne, 2015). For dynamics of co-provision and customer engagement some time now, instruments of alternative finance such in the production, delivery and management of energy. as microcredit and microfinance have been developed worldwide to respond to such needs and to increase accessibility to capital for the less ‘bankable’ projects. This paper provides an overview of the development of crowdfunding worldwide, pointing out its applicability to the energy sector and the potential benefits accruing from it. More recently, the financial crisis have reduced credit opportunities in developed economies, making access to capital for new investments more difficult for citizens and 2. What is crowdfunding? firms. New financing instruments outside the traditional banking sector are emerging (such as crowdfunding, peer to peer lending, SME mini-bonds, social impact bonds, Crowdfunding is an innovative form of alternative community shares, virtual currencies), particularly in finance which allows a project, an organization or Europe, USA and emerging markets. In this context sits a company to raise money from the general public the growth of crowdfunding, a novel answer to the need Page2 for seed finance, products development or social such model is civic crowdfunding, where citizens’ causes through open calls via the internet. It began contributions are used to finance public works or to spread, mainly in USA and Europe, around 2008 services for communities. Emblematic examples in part as a response to the western economies’ are: Philadelphia city raising 12,875$ to plant 15,000 credit crunch and economic crisis. The concept of trees; or Rotterdam raising funds to build a wooden raising money through general public is not new in pedestrian bridge with the slogan: “The more you socio-economic systems (e.g. fundraising is a well- donate, the longer the bridge”; or the Louvre raising developed practice in the not-for-profit sector (Mullin, €1 million from ~2700 donations to buy a painting by 1995)) and crowdfunding falls within a wider group Lucas Cranach, ‘The three graces’. of alternative finance options (including microfinance and impact investing) which have emerged over time Another form of non-financial crowdfunding is the as alternative finance mechanisms. reward based model where individuals provide capital to support a project in exchange for some However, what specifically characterizes kind of benefit or award; such award could also be crowdfunding is the use of internet and dedicated the product that will be produced with the capital web platforms to raise money. This has been made collected and, in this form, it becomes a sort of possible by the widespread adoption of information e-commerce. Typical examples are musicians who and communication technology (ICT) and the raise funds to record an album in exchange of the progressive increasing use of technology-enabled copy of the album once released. Reward based social networks to interact and connect online1 crowdfunding has also been used extensively by . Crowdfunding campaigns are based on web businesses or innovators, often as a tool to assess platforms where projects are presented to the public demand for a new potential product or service by and beneficiaries of the funding can communicate raising on crowdfunding platforms capital for pilot and engage with their community of potential donors design and production. Examples of renown reward or investors, and through which people can donate or platforms are Kickstarter and Indigogo based in the invest money. Crowdfunding can indeed be defined USA; e.g. Kickstarter alone raised in 2014 more than as an ‘economic superstructure’ of social networks half billion dollars from over 3 million of investors and and crowdsourcing2 . has launched extremely successful campaigns such as Oculus Rift (which raised over $2 million) and Pebble (which raised over $10millions). Crowdfunding models The following are the main financial crowdfunding There exists several types of crowdfunding models, models: lending and equity based crowdfunding. which can be grouped in two overarching categories, which differentiate themselves on the basis of the With lending crowdfunding funders receive a debt relationship between those who provide financial instrument that specifies future terms of payment, resources and those that receive the funds (i.e., usually a fixed rate of interest. Lending platforms can recipients): be peer-to-peer (i.e. lending among individuals) or peer-to-business (i.e. lending to support a business activity). With equity crowdfunding funders receive 1. Non-financial or donation crowdfunding, where an equity instrument or a profit sharing arrangement. individuals’ contributions are not associated with a In this case the returns on the investment are financial return and; dependent on the company’s performance, thus 2. Financial or investing crowdfunding, where financial potentially higher than the case of lending, but also instruments are sold in relation to companies assets accompanied with a higher risk. A third less common and/or financial performance. model which is gaining traction more recently is the royalty-based model, where funders receive a royalty interest derived from intellectual property of Non-financial crowdfunding can be pure calls for the fundraising company (e.g. the funder receives donations which are given without expectation of any a contract that guarantees him a percentage or a financial returns or benefit, thus relying on altruistic fixed amount of the revenues accruing from royalties motives. Typical donation campaigns are run for interest in a company’s intellectual property). charitable or public interest causes. A declination of Page3 Figure 1: Overview of major crowdfunding models Current market development has been steadily growing overtime. The number of platforms has been dramatically increasing worldwide Apart from some pioneering initiatives in the early as well as funding volume, moving from about $53 2000’s (such as lending platform Zopa in the UK million in 2010 to over $16 billion in 2014 (Figure 2). in 2005, equity crowdfunding platform ASSOB in Australia in 2006 or reward crowdfunding platform North America and Europe are the major markets, but Produzioni dal Basso in Italy in 2005)3 crowdfunding the Asian market is quickly growing experiencing an appears as a wider phenomenon around 2008, when increase in funding volume of 320% in 2014 (Figure platforms such as Indigogo or Kickstarter4 have 3). been launched. Since then the crowdfunding market Figure 2: Crowdfunding funding volume worldwide in $billion Source: (Massolution, 2015, Massolution, 2013) Figure 3: Crowdfunding volumes by region in $ billion, 2014 Source: (Massolution, 2015) Page4 The lending-based model has the largest market and royalty based ones are recently gaining more share and has grown most rapidly, followed by traction (Figure 4). donation and reward-based crowdfunding. Equity- Note: Hybrid models are platforms that offer one or based as well as more novel models such as hybrid more crowdfunding models on a single platform. Fgiure 4: Funding volumes by crowdfunding model, $ billion, 2014 The innovative nature and the benefits of platform can and have been used to raise funding crowdfunding for environmental campaigns and more specifically renewable energy projects e.g. to fund small solar installations on schools5 or in developing countries6 Crowdfunding is not only an alternative source of . However, the financial/investing platforms are those funding, which allows raising funds for projects mostly used to date in the context of energy and that could not be financed through institutional raising higher amount of money. There exists several channels. Crowdfunding platforms are also powerful active platforms worldwide ‘vertically’ focused on the communication tools, as they allow full transparency sector, which are already proving to be a powerful and open communication on projects, enabling method to raise capital in particular for renewable investors, stakeholders and communities to engage energy projects. Apart for few examples of peer-to- with the project proponents, get involved and monitor peer lending platforms used by individuals to buy progress over time. customer owned renewables generation such as domestic PV plants or to implement
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