Peer-To-Peer Financing Mechanisms to Accelerate Renewable Energy Deployment Kadra Branker, Emily Shackles, Joshua Pearce

Peer-to-Peer Financing Mechanisms to Accelerate Renewable Energy Deployment Kadra Branker, Emily Shackles, Joshua Pearce

To cite this version:

Kadra Branker, Emily Shackles, Joshua Pearce. Peer-to-Peer Financing Mechanisms to Accelerate Renewable Energy Deployment. Journal of Sustainable Finance & Investment, Taylor & Francis, 2011, 1 (2), pp.138-155. 10.1080/20430795.2011.582325. hal-02120491

HAL Id: hal-02120491 https://hal.archives-ouvertes.fr/hal-02120491 Submitted on 6 May 2019

HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325

Peer-to-Peer Financing Mechanisms to Accelerate Renewable Energy Deployment by Kadra Branker, Emily Shackles, and Joshua M. Pearce* Department of Mechanical and Materials Engineering Queen’s University 60 Union Street, Kingston, Ontario, K7L 3N6 Canada * Corresponding author: ph: 613-533-3369, e-mail: [email protected]

Abstract Despite the clear need to reduce greenhouse gas emissions, lack of access to capital and appropriate financing mechanisms has limited the deployment of renewable energy technologies (RETs). Feed-in Tariff (FIT) programs have been used successfully in many countries to make RETs more economically feasible. Unfortunately, the large capital costs of RETs can result in both the slow uptake of FIT programs and incomplete capture of deployment potential. Subsidies are concentrated in financial institutions rather than the greater population as traditional bank loans are required to fund RET projects. This paper critically analyzes and considers the political, financial and logistical risks of an innovative peer-to-peer financing mechanism. This mechanism has the goal of increasing RET deployment capacity under a FIT program in an effort to equitably distribute both the environmental and economic advantages throughout the entire population. Using the Ontario FIT program as a case study, this article illustrates how the guaranteed income stream from a solar photovoltaic system can be modeled as an investment and how peer-to-peer lending mechanisms can then be used to provide capital for the initial costs. The requirements for and limitations of these types of funding mechanisms for RETs are quantified and discussed and future work to deploy this methodology is described. Key words: Feed-in tariff; microfinance; peer to peer lending; renewable energy; funding innovation; photovoltaic; sustainability

1. Introduction As a variety of environmental tipping elements reach their critical point due to anthropogenic climate destabilization (Lenton et al., 2008; Hansen, 2008), society clearly must limit its fossil fuel consumption. Green house gas emissions from fossil fuel combustion for energy generation continue to cause irreversible damage to the global environment (IPCC, 2001; Alley et al., 2003) and compromise human health (IPCC, 2001). To meet our growing energy

Electronic copy available at: http://ssrn.com/abstract=2006691 Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325 needs in a sustainable manner that will mitigate the adverse effects of fossil fuel combustion, an increased use of renewable energy technologies (RETs), including wind, solar, biomass and geothermal is required (Dincer, 2000; Pearce, 2002; Caldeira et al., 2003). Realizing this, many of the world's governments have moved to improve the economics of RET projects, by offering policy-supported financial incentives (programs), such as the Feed- in Tariff (FIT), which have been implemented in over 64 jurisdictions (REN, 2009). FIT programs are based on contracts with a local utility to purchase energy generated by RETs with variable capacity (Pietruszko, 2006; REN 21, 2009). Unfortunately, even with these widespread policy directives, a direct barrier to RET deployment is a lack of access to credit (Wilkins, 2002; Pietruszko, 2006). This barrier is most acute for the world's poorest. Roughly two-thirds of the world’s population live on less than US$1,400 a year, with only a fraction having access to financial services (WISIONS, 2006). There is a strong correlation between low-income and lack of financial access (Beck et al., 2005; Rao et al., 2009). Poorer individuals face higher interest rates and onerous loan terms from formal or informal financial agreements (Robinson, 2001; Basu and Srivastava, 2005; Rao et al., 2009). If low-income individuals or small entrepreneurs were able to secure bank loans separate from credit history, they would be able to finance high return on investment RET projects, which would spur economic growth (Beck et al., 2005). A FIT contract could provide improved security for such a loan. While the guaranteed FIT contracts present an economic reason for banks to provide low interest, long-term loans, historical banking protocol prohibits separating the loan from the individual’s credit history and conventional income. Peer-to-peer (P2P) lending mechanisms (in which people with money, loan to those with less without the involvement of formal financial institutions) provide a potential solution to this problem. Under such a lending program, small- scale renewable energy generators such as individual homeowners could gain access to additional capital based on the investment return for their project, separate from their credit history or current earning capability. This paper explores the viability of several P2P lending mechanisms as a means to accelerate RET deployment with FIT contracts by making RET financing available to more individuals. Firstly, FIT contracts will be outlined and the world's FIT programs summarized. An overview of P2P and microfinance (MF) lending focused on applying these practices to RET deployment will follow. Finally, using solar photovoltaics (PVs) and the Ontario FIT as a case study, this paper will determine if a P2P-RET investment scheme would provide the financing that could serve several positive social and environmental aims including income generation, reduction in greenhouse gases, and energy security. Economic and logistical viability, along with both benefits and drawbacks of each mechanism will be discussed and conclusions drawn.

2. Feed-in Tariff Programs Feed-in Tariff (FIT) programs are designed to provide incentives for investment in RETs that are connected to the electricity grid (OPA, 2009; EPIA, 2008; WFC, 2007). A FIT is the rate that a utility commits to paying for electricity generated by local renewable energy producers. The size of the tariff is determined by the public energy authorities and is usually considerably higher than the “market” price for electricity in that jurisdiction, and is guaranteed for a specific time period (Pietruszko, 2006; WFC, 2007). The most common contract length is 20 years although ranges of 1 to 40 years can be found (Pietruszko, 2006; OPA, 2009; Peters and Weis,

2008). Both the premium price and the guaranteed period of payment are specifically designed to change investor behavior by making it financially prudent to choose environmentally desirable technologies. Many of these FIT programs also have a schedule of degression of the tariff for new installations at specified years to stimulate the technology development required to decrease production costs (Pietruszko, 2006; EEG 2007). FITs have been used in many countries, most notably Germany for over two decades, and have been open to residential and commercial applications alike (EEG, 2007; WFC, 2007; Pietruszko, 2006). FITs have proven to be the most effective market support mechanism for RETs, with countries who have adopted this scheme having experienced the largest growths in RET deployment (Pietruszko, 2006; REN21, 2009; EPIA, 2008). In 2009, of the 73 countries that have renewable energy targets, at least 64 jurisdictions have polices to promote RETs with FITs (REN21, 2009). Figure 1 illustrates the geographic distribution of countries, provinces and states with enacted FITs. The inset shows the cumulative number of jurisdictions that have enacted FITs from 1978 to early 2009, which shows an increasing trend. Some countries have removed caps, extended program periods and expanded eligibility for their FIT program (REN21, 2009). The average annual solar irradiation (solar energy incident per area) adapted from the Atmospheric Science Data Center is illustrated for the FIT jurisdictions, indicating that programs exist for a range of solar irradiation. Figure 1 shows that Germany does not have the highest solar irradiation, yet it is known as having one of the most successful programs (Pietruszko, 2006; REN21, 2009; EPIA, 2008).

[Insert Figure 1 about here]

FITs have been successful due to standardized program rules, contracts and prices (that are easily adapted) that allow for a reasonable return on investment while remaining cost competitive (GEAA, 2009; Pietruszko, 2006). Two-thirds of the world’s wind energy and half of the world’s solar PV systems have been installed because of FITs (Peters and Weis, 2008). The highly successful German Energy Law, Erneuerbare-Energian-Gesetz (EEG) was enacted in 2000, replacing its 1990 predecessor, the Electricity Feed Act (StrEG) to enforce the feed-in tariff policy. It was amended in 2004, 2007 (EEG, 2007) and 2009 (PACT, 2009). The revision in 2000 meant the removal of the cap on RET capacity for the grid and a revised tariff, which stimulated the RET market for Germany so much that they met their 2010 RET target of 12.5% RETs three years early in 2007 (Peters and Weis, 2008; EEG, 2007). Because of Germany’s success with the program, more than 18 countries have adopted similar statutory regulations based on the EEG (EEG, 2007; WFC, 2007). Pietruszko suggested that the clear payback periods and return under FITs should qualify the investment in RETs for preferential financing options (2006). Small businesses and larger corporations are poised to take advantage of this opportunity because they have access to capital due to their established reputation with the banks (Ashta and Assadi, 2008). In the case of low to middle income homeowners and micro-entrepreneurs barriers to accessing appropriate financing though financial institutions limit their chances of taking full advantage of the FIT and of investing in a sustainable future (Fuller et al., 2009; Margolis and Zuboy, 2006; Pembina, 1999). Mortgage refinancing proves to be an expensive financing option, with the further difficulty that Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325 it must be repaid before resale of the home (Fuller et al., 2009). Therefore, there is a need for alternative financing methods.

2.1 Assessment of Feed in Tariffs It has been shown that FITs have the benefit of being easy to administer, effectively encouraging an increase in RET deployment over a wide geography, spreading the burden of RET investment, creating new industrial activity (creating jobs), stimulating innovation in the respective RETs, and reducing pollution and greenhouse gas emissions by offsetting conventional energy sources (Pietruszko, 2006; REN21, 2009; EPIA, 2008; OPA, 2010; PA, 2010). Unfortunately, FITs also have disadvantages given than it is an economic incentive instrument. As a subsidy for RETs, FITs may cause the economy to experience a higher cost indirectly, although this is not unlike current subsidies for conventional energy sources (PA, 2010). Arguably, increases in energy pricing may lead to more conservation (Zoumides, 2009), which can be viewed as a detriment to the poor and energy-intensive industries or an environmental advantage for a given region. Pricing of FIT rates can also be a problem, if the FIT rates are set too high that RET producers gain too high a profit and society ends up paying more than is necessary for the FIT benefits. In addition, if specific technologies are subsidized, alternative, viable forms may be overlooked, within the constraints of natural endowments (PA, 2010). Finally, there is a burden on the government to choose premiums that are price competitive with the existing grid to be effective, although they may not have perfect information about prices and technologies (PA, 2010). Changes in governance and political pressure may further jeopardize the longevity of programs and again threaten some of the potential benefits (e.g. manufacturing plants moving). Although economic incentives might be economically efficient, environmental effectiveness might be uncertain, for example if the use of RETs for carbon dioxide mitigation might create new environmental problems due to technological uncertainty (Zoumides and Zachariadis, 2009; Goeschl and Perino, 2009). In the case of FITs, unforeseen future problems may reduce the effectiveness of the current energy policy. Finally, other policy instruments may be more efficient for obtaining environmental goals such as taxation or tax benefits, regulation and enforcement, other types of market incentives, and stakeholder governance (Faure, et al., 2003. Faure and Skogh, 2003; Jarvie, 2009; Germani and Scaramozzino 2007).

3. Background on Microfinance and Peer-to-Peer Lending 3.1 Definitions and Organizations A loan is defined by its size, term, interest rate, collateral requirements, usage restrictions and repayment terms (Waterfield, 2001). For these products, traditional financial institutions generally distribute the costs (such as transactions and operational) and risks (credit and reinvesting) over the entire clientele (Waterfield, 2001; Beck et al., 2005; Pritchard, 2005). In addition, there are rigid collateral and minimum loan size requirements – a situation that favors those with equity, which clearly penalizes low-income individuals seeking financing, particularly when it is modest. It is therefore useful to consider financing RETs through socially responsible investing (SRI), which seeks to maximize both financial return and social benefit. Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325

The two main alternatives considered below are: 1) Microfinance (specifically loans), and 2) Peer-to-peer financing. Each has obvious social benefits, and each potentially allows low income investors to participate in RET development, but function differently as seen in Figure 2. Microfinance (MF) involves providing financial services (including loans) to low-income individuals who lack access to traditional services (generally in the developing world), and is facilitated by a traditional financial institution (Ledgerwood, 2000; CGAP 2002; Counts 2004; Godquin, 2004; Fehr and Hishigsuren, 2004). Individuals can contribute to an MF fund that the bank uses to provide MF loans. Peer-to-peer lending (P2P) on the other hand, does not involve a traditional financial institution and covers only financial transactions (lending or borrowing) between individuals whose income status can vary (Fehr and Hishigsuren, 2004; Crabb, 2008). In P2P financing many lenders (usually individuals) provide funds more or less directly to many borrowers. What is more, a single borrower may receive funds from numerous lenders. In addition, the mechanism of P2P lending can be used to acquire funds for MF loans, where the MF loan can be considered a subset of P2P lending. However, P2P lending in its original definition has the advantage of not involving a traditional financial institution to facilitate the loans, thus not targeting a given income group.

[Insert Figure 2 about here]

It is important here to distinguish between secured and unsecured P2P lending. In secured P2P the strength of the collateral of the borrower is used to secure the lender’s investment in the terms and conditions of the loan, without the high transaction costs associated with a traditional bank. In an unsecured P2P loan, the lender gives money to the borrower based on the borrower’s credit rating and other attributes in either pooled lending or direct lending (Pritchard, 2005). In pooled lending, money is lent to a fund or a pool of borrowers with similar credit ratings. Lending small amounts to several borrowers helps to manage the risk of individual default (Lai and Turban, 2008). MicroPlace (2007) is an example of a platform that does not allow the lender to select an individual borrower. In contrast, in direct lending, money is lent to a specific borrower based on their attributes and the lender assumes a higher risk. However, the lender can reduce their risk by considering information about the borrower, such as credit score, debt-to-income ratio and income, that can be used to decide how to direct their investment. Examples of direct lending platforms are Kiva, Propser, CommunityLend and Lending Club1. Apart from the direct versus pooled lending distinction, Ashta and Assadi (2008) presents a detailed overview of four distinct business models for P2P lending platforms which are microfinance (non-profit), social investing (low return), marketplace and /or auction (high return) and social lending service (low return between family and friends). Figure 3 summarizes examples of these models and their characteristics.

[Insert Figure 3 about here]

As mentioned before, P2P lending can enable MF organizations to access capital alternatively and allows the general public to participate in the social benefits of MF, and thus SRI (Ashta and Assadi, 2008). Examples of these organizations include Kiva, MYC4, United Prosperity and Wokai which allow different kinds of contributions. Kiva (2005) is a micro- Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325 lending website that enables individuals to lend money without interest to micro-entrepreneurs in the developing world through a MF institution. In contrast, MYC4 (Denmark, 2007) connects global lenders with African entrepreneurs at low interest rates. The act of investing in entrepreneurs while getting a lower than market return but creating social benefit is considered to be 'social investing'. Microplace (2007) allows investment in MF institution funds for the poor or small entrepreneurs in several locations including Mexico, Peru, India and the United States. United Prosperity (2008) permits an individual to guarantee a loan to the entrepreneur they choose to support though PayPal, at no interest. They consolidate the guarantee loans with a microfinance institution to raise funds to loan to entrepreneurs. Using the loan-guarantees to access more money through established financial institutions ensures that the initial guarantee has a greater impact. Lastly, Wokai (2006) enables individuals to use their donations to Chinese entrepreneurs as a tax deduction in the United States. The 'marketplace' model allows investment at rates dictated by the loans market an example of which is the Lending Club. This is sometimes combined with the “auction” model, where lenders can bid interest rates and other loan terms as a competitive market as with Prosper. The auction model ensures the borrower gets the lowest possible interest rates. Lastly, a “social lending service”, like Virgin Money, is a facilitator for loans between family and friends only. Loan terms are arranged between members, but Virgin Money does the paperwork and processes the transactions.

3.2 Current Connections between P2P/MF Lending and RET Deployment Microfinance (without a P2P mechanism) is being used to help the low-income population in developing countries access renewable energy resources (WISIONS, 2006). Specifically, Srinivasan referred to off-grid applications that help improve the quality of life of individuals in developing countries by providing services such as lighting and cooking. These applications do not generate income, but help with poverty alleviation, cost avoidance of less sustainable energy sources and represents a “quality of life” investment that should qualify for micro funding (2007). Further, access to renewable energy devices could improve micro- enterprises/ entrepreneurs, hospitals and other services (Srinivasan, 2007; WISIONS, 2006; Nova-Hildesley, 2006). Rao et al. introduced an energy-microfinance framework for helping low-income households in India access energy, including renewable energy sources (2009). Although there has been success in using MF to benefit the rural poor of developing nations to acquire RETs (SEEDS, 2006; Nova-Hildesley, 2006), MF is not aimed at growing the RET sector (Liming, 2009). P2P lending has some existing application in RET deployment. Prosper has green loans for green home improvement projects, which includes using renewable green energy to get “off the grid”2. Innovatively, traditional P2P and MF lending could be expanded to facilitating capital to increase RET deployment globally. Under a P2P lending framework (of which MF can be a business model), lenders could direct their money to RET projects around the world while gaining a return on investment because of the revenue stream guaranteed under a FIT program. Engaging the participation of low-income persons in RET deployment under FITs with P2P lending is one method to maximize the economic benefit to the poor while helping with climate change initiatives (Moser et al., 2008). Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325

3.3 Unintended Consequence Risks in Microfinance This section applies to MF as the larger concept. MF institutions came under scrutiny at the end of 2010 following an increase in the number of suicides in Andhra Pradesh, India as a result of increased indebtedness of poor individuals. Schmidt attributed the recent suicides as a product of other circumstances in addition to recent attempts by MF institution to commercialize, scale up or be more credit-driven (2010). A combination of profit seeking growth of some MFIs and inappropriate regulations have caused unethical practices such as encouraging individuals to take out multiple loans simultaneously, sub-contracting lenders and using strong arm techniques to coerce borrowers for repayment (Schmidt, 2010). However, the vast majority of poor in India still use informal loans, with only 11% using MF credit. Thus, when individuals have multiple loans, sometimes using one to repay another, increased indebtedness results that can lead to suicide, when coercion tips the scale (Schmidt, 2010; Grant, 2010). A challenge for the MF sector will be refocusing on their mission to empower the worlds poor instead of focusing on profits. Furthermore, government regulation will be needed to protect the poor, whilst allowing MFIs to access donations and funding to recoup their costs. It should be pointed out that the vast majority of MF loans continue to assist rather than hurt the poor as they provide access to credit at much lower rates than is normally available to them and also simply access to any credit at all to help people pull themselves up the economic ladder.

4. Combining Peer-to-Peer lending and FIT programs All peer-to-peer lending network business models provide an accessible form of capital, allowing even low-income individuals to capitalize on FIT programs while increasing the deployment of RETs. P2P lending networks and the unsecured loans market represent an abundant untapped financial resource for accelerating the deployment of RETs. It was predicted in 2008 that social lending platforms will have a market share of 10% of the worldwide retail lending and financial planning market by 2010 (Gartner Inc., 2008).

4.1 Basic Framework of the P2P-FIT-RET Network As outlined in Sec. 2, FIT programs can be observed around the world through the reports summarized in Sec. 2 and Figure 1. Figure 4 shows the basic framework for the proposed ideal P2P-FIT-RET network that will be discussed, using a solar PV system as a RET example.

[Insert Figure 4 about here]

Although current P2P business models exist, they traditionally do not lend the large sums of required capital for renewable energy projects, nor do they allow a long enough payback period to fully exploit the FIT programs. A global P2P framework is required that allows people from around the world to be both borrowers and lenders as shown in Figure 4. The income provided by electricity production via a RET under a FIT contract allows a prospective borrower to act as a micro-entrepreneur. Accurate predictions of RET system performance and costs can be made, allowing the project internal rate of return and payback period to be assessed before funding is required. As a result, the expected performance output can be made available to Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325 potential lenders via the borrower’s P2P profile, and for added confidence, certified by a third party installer/retailer. The borrower or P2P network would set the loan’s terms based on the project’s financial analysis and lenders could decide which interest rates and durations to invest in and/or bid on loan conditions (Pritchard, 2005). Direct lending will allow the investor to choose which project they want to fund and under what loan terms. Pooled lending could be used where the investment is spread across a group of RET projects with similar rates of return, specifications and locations. Pooled lending would be particularly useful for community based or co-operative (co-op) RET projects. An example of co-op RET project management is the Toronto Renewable Energy Co-operative (TREC)3 that develops community RET projects in wind and solar. Repayment schedules not traditionally employed by P2P lending networks should be used to take full advantage of the unique nature of the FIT contract. Two options exist: i) getting automatic repayments during the loan term and ii) getting a lump sum repayment at the end of the loan term. The first is akin to traditional repayment schedules with the exception that the loan term can be 20 years. Under the second it may be beneficial to consider investments as sunk for the duration of the contract because of the 20-year FIT contract length. For example, relatives could make an investment in a P2P–FIT-RET project at the birth of a child (in the child’s name). This investment would come to maturity and be paid back with interest on the child’s 20th birthday, similar to a Registered Educational Savings Plan (RESP)4. A similar investment could be made with the intention of using the repayment as a means of supplementing retirement income. To ensure that investors are repaid, a waterfall payment scheme could be combined with an Escrow account model5. As the solar PV panels generate income, the amount due to the lenders would be funneled into a holdings account (to earn interest) as the primary flow (Figure 4). Only when the required monthly (or yearly) payments are made into this fund would the person with the solar PV system on their roof receive payment from the panels (the overflow or secondary flow) that month (or year). All of the models introduced in Sec. 3.1 could be modified to include investment for FIT- RETs around the world. Since all of the P2P portals have a web interface, opening access to members globally should be possible. Section 5 will discuss how the FIT-RET can be modeled as an investment and a micro-entrepreneurial activity.

4.2 P2P Framework Requirements for Success Modifications of loan conditions are needed to take full advantage of the earning potential, and will require long-term investment on the part of the investors. Establishing trust between the lender and borrower is paramount to a successful arrangement, as is mitigating the risk of default and providing loan security.

4.2.1 Larger and Longer Term Loans Microfinance programs in developing countries have fallen short of providing credit for domestic RE systems due to small loan sizes and short terms (Srinivasan, 2007). For an example of the magnitude of the loan ($9, 835 CAD) needed consider a very small residential system (1 kW) in Figure 5, which is much larger than the typical MF loan. Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325

[Insert Figure 5 about here]

On the other hand, P2P investments are not on the order of the size of investment or loan term (Figure 5) needed to take advantage of the FITs and optimize RET systems. For example, Prosper and Lending Club have a maximum of US$25,000 that can be borrowed. While this may pay for the small system in Figure 5, an economic optimum system for a house could be 10 times larger. Any financial service for low-income groups would only be effective if the repayments of loans do not divert from required consumption (ProVention, 2007). Thus, a sufficient loan size and term is required such that loan repayments can be covered by the FIT income to avoid drawing money from other income sources. To address the required loan terms and conditions, the loan support mechanisms need to be improved separate from traditional collateral. A waterfall account model with a loan period on the order of the payback period of the investment, with rules similar to an annuity or retirement plan will be needed as a new loan support mechanism. FIT payments go directly to the holding (waterfall/escrow) account, where the required repayments to the lender are held and the overflow or remainder is directed to the RET owner. This removes the responsibility of the borrower from making the payments. Auto-withdrawal of loan repayments from the holding account to the lenders’ account can be done as a traditional loan immediately. In the case of a retirement plan or birth gift, the lump sum after interest earned is repaid in the pre-designated surrender period generally at the end of the loan term. Besides innovative loan support mechanisms, online trust and low default probability are required to secure larger, longer-term loans.

4.2.2 Online Trust and Risk of Default The difficulty of establishing trust in online platforms between peers due to information asymmetry and difficulty in monitoring the other party has been recognized (Ashta and Assadi, 2008; Kwan and Ramachandran, 2009; Berger and Gleisner, 2009). The information asymmetry for an investment include whether a project will create value (adverse selection) and if the borrower has the capacity to realize and repay the investment project (moral hazard) (Ashta and Assadi, 2008). Trust is established by creating proxies for physical trust and consequences for abusing that trust. P2P lending platforms are using Web 2.0 software interfaces to overcome the challenges (Ashta and Assadi, 2008; Kwan and Ramachandran, 2009; Berger and Gleisner, 2009). An innovative P2P-FIT-RET lending platform would require information exchange and commentary applications on an interactive interface (Web 2.0) where lenders and borrowers can discuss the details of the transaction and project. Further, the borrower profile could indicate their credit score, debt-to-income ratio, other income generating activities and assets to act as proxies. It is suggested that peer screening can enhance accountability and portfolio quality in MF (Srinivasan, 2007; Waterfield, 2001). Consequently, additional trust is gained if the borrower gets a credible peer recommendation for their profile in addition to the third party verification of the RET system viability (Fig . 2) to “secure” a more favorable loan or funding pool. Social networks, such as friends, colleagues and employees can improve “social” trust (Lai and Turban, 2008). For example, the Lending Club uses a Facebook application to invoke a person’s network as part of the loan decision. Loan listing on Facebook gives the loan more reach through their Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325 friends’ networks and increases the probability of finding suitable loans. Additionally, previous lenders can provide comments about the borrower on some platforms (e.g. Prosper). By allowing multiple people to apply for a loan as a group, “social collateral” is provided by joint liability (Ghatak, 2000). Since the group is jointly liable, members are able to help one another should one person default. As a result, peer pressure, monitoring and other social consequences ensure that individuals repay their portion of the loan. To continue to qualify for loans, it is within the group’s interest to repay the loan (although regulation/monitoring would be needed to penalize overzealous coercion). In MF, larger loans are allocated to those individuals or groups with lower default probability or record (Ghatak, 2000; Godquin, 2004). Thus joint liability would be beneficial in the case of a co-operative RET project in a community. Lastly, to protect the reputation of the P2P lending organization and further discourage extensive default, the account of the borrower that defaults is given to a collection agency that extracts the necessary funds from the borrower to repay his/her creditors, and, his/her credit rating is reduced as assessed by a cooperating credit reporting agency (Berger and Gleisner, 2009). Of course, clauses will be needed should the default be caused by extenuating circumstances or ‘acts of God’.

4.2.3 Loan Security As an additional precaution, loan security is enhanced by insuring the RET system (e.g. micro insurance) with a MF or other respectable institution (Srinivasan, 2007). Therefore this concept can be applied to P2P-FIT lending by including insurance on the RET system as part of the loan requirements.

Other clauses to protect the lender would include immediate loan repayment upon loss of control of the property that supports the RET (such as sale). It should also be mandatory that the RET is backed by a manufacturer’s warranty that is at least the length of the loan term. To secure project success certified technicians and certified electrical components should be required and used.

5. Case Study: Peer to Peer Lending for the Ontario PV Rooftop FIT This is an illustrative case study used to indicate how the P2P-FIT-RET framework might financially function for an individual project, assuming a working system is in place and the utmost simplicity. After assessing the investment potential of the RET under the FIT in Sec. 5.2.1, the various P2P lending models will be used to finance the investment in Sec. 5.2.2. The analysis will use the Feed-in Tariff (FIT) for Ontario7 for a solar PV system. The FIT program is a directive of the Ontario Green Energy and Economy Act passed into law May 2009 with the initiative to develop RETs in Ontario (GEAA, 2009). Solar photovoltaic (PV) systems under 10 kW (micro-FIT) receive the highest price at 80.2 ¢/kWh (OPA, 2009) for a period of 20 years6 and has been the most popular small scale installation (OPA, 2010). By modeling a FIT energy contract as an investment, homeowners can become both energy generators and micro- entrepreneurs. This case study will examine the financial analysis and investment potential of a 1 kW solar PV system in Kingston, Ontario, Canada (where there is greatest access to specific information for the research team). All the different P2P models introduced in Sec. 3 will then be applied to financing the investment with the modified terms mentioned in Sec. 4. Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325

The Ontario FIT program replaced a previous program called the Renewable Energy Standard Offer Program (RESOP) and is part of Ontario’s plan to replace coal-fired generation, develop a sustainable electricity grid and create jobs (OPA, 2009). The RESOP experienced low uptake such that modifications were made to create a FIT program that would be more successful, such as prices that allow for a greater return (OPA, 2009; GEAA, 2009). In its first year, the Ontario FIT has been comparable if not more successful in the capacity of RETs deployed adjusted for population compared to the European countries Spain, France and Germany (GEAA, 2010). None-the-less, the portion of energy supplied by RETs as compared to the conventional electricity sources (including hydroelectric) in Ontario is still small (3 to 5% ) (IESO, 2010). As a new program, there is a large potential for growth especially with additional support from an innovative financing method as proposed here. The majority of the new RET capacity (99%) is from larger commercial, community and agricultural projects (OPA, 2010) where there is currently greater access to capital in Canada. Individuals still find getting the upfront capital at reasonable terms difficult. Thus, the benefit of an innovative funding framework is maximizing the benefit or such programs at every level, including individual endeavors.

5.1 Methodology Using RETScreen 4, the average yearly solar electrical energy produced and therefore income from the PV system are calculated8. Figure 6 illustrates the inputs for RETScreen. In addition, a contract price of $802/MWh was entered which is equivalent to 80.2¢/kWh (OPA, 2009). The total quotation of system cost was acquired from Kingston, Ontario companies and suppliers for the end of 2009 (Figure 5). With the installed cost of the system and the yearly income generated under the FIT, a basic financial analysis is presented using the following equations adapted from Bellas and Zerbe (2006) and RETScreen (2005). The primary outputs of this analysis are the internal rate of return and payback period for the PV project needed to assess the investment.

[Insert Figure 6 about here]

All expenses are considered as cash outflows, and all income or benefits are cash inflows 9 and occur at the end of each year . For year zero, the cash flow Cout, 0 is equal to the project initial cost, Cinitial :

Cout,0 =C initial (5.1)

For subsequent years, the cash outflows at a given year are given by Cout,n: n Cout,n =C O & M 1+r  (5.2) where CO&M are operation and maintenance costs, r is the discount interest rate for the cash flows and n is the year. A social discount rate of 2% (noting the Ontario rates go from 2% to 8%) will be used for r (OPA, 2008). Insurance premiums are assumed to be the only CO&M for the PV system in this analysis, as PV panels require negligible maintenance. The cash inflows for year zero, Cin,0 , includes any rebates or incentives (IG) that might be received additional to the FIT at Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325 the beginning of the project. For this analysis, Cin,0 is assumed zero, because there are currently no additional incentives in Ontario apart from the FIT. The cash inflows for subsequent years, Cin,n are as a result of the FIT income that year, CFIT,n where Sn is the solar energy input:

CFIT,n =FIT  $802/ MWh×Sn MWh (5.3)

n Cin,n =C FIT,n1+r  (5.4) To incorporate the degradation of the RET, Eq. 5.4 was modified using the refined value of CFIT,n as shown in Eg. 5.5 n−1 (5.5) CFIT,n =C FIT,n=11−dr  to become: n n−1 Cin,n =C FIT,n=11+r  1−dr  (5.6) where dr is the rate of degradation (decrease in energy production) of the RET. Note that other financial data can be added for other RETs than solar PV and other client specifications (such as depreciation). For this analysis, the rate is considered constant. The net cash flow for a given year, Cn , is then given by combining Eq. 5.6 and Eq. 5.2:

Cn =Cin,n−C out,n (5.7) For the case where the FIT income is taxable at a rate, t, the net cash flow (Eq. 5.7) is modified to become Ĉn :  Cn =Cn−tC FIT,n (5.8) The average combined income tax rate (t) for a homeowner in Ontario was taken to be 16.9% (OECD, 2007) which considered all deductions and credits for an average family with two children, who would most likely invest in the lowest sizing bracket (<10 kW). Finally, the internal rate of return and payback period can be found once the yearly net cash flows are determined. The Internal Rate of Return (IRR) of the project is considered the discount rate at which the net benefits and costs (or net cumulative cash flows) equal zero. It is also considered the break even interest rate and is compared against other project IRRs or an individual’s minimum acceptable rate of return to determine which project is most viable (Bellas and Zerbe, 2006; Pearce, Denkenberger, and Zielonka, 2009). Thus r is replaced by IRR and found by iteration using : N  Cn 0= ∑ n (5.9) n= 0 1 +IRR This can be calculated for different scenarios. The payback period or years to positive cash flow (NPCF )is the first year that the cumulative cash flows for the project are positive and is calculated using:

N PCF  0=∑ Cn (5.10) n= 0 The different P2P mechanisms were then applied to the investment represented by the PV system under the FIT. Common loan calculation methodology applies compounding interest annually Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325 and adding principal and interest payments to create the total annual payment (Leblanc et al., 2007).

5.2 Results and Analysis As mentioned before, a rooftop solar PV system in Kingston, Ontario, Canada under the Ontario FIT will be used for the case study. The time period for the analysis starts from December 2009 and uses the 20 year FIT contract length as the duration (N).

5.2.1 The Rooftop Solar PV as an Investment For Kingston, ON, the average yearly income from a 1 kW system is estimated to be $1,106.70 (CFIT,n=1) per year generating 1,380 kWh per year (Sn) calculated using RETScreen and the inputs in Figure 6, without accounting for degradation. The total cost of the system is estimated at $9,835 (Cout, 0 ) with a cost breakdown shown in Figure 5, showing CO&M as $60 per year. The quoted cost for an installed system of $8.50/ W was used in the estimation. In order to demonstrate the relatively wide applicability of the FIT in Kingston, Figure 7a and b show the low sensitivity of solar energy output from a 1kW PV system to roof tilt (a) and south facing orientation (b) in Kingston. The simulation in RETScreen used a 45 degrees roof tilt facing due south, whilst varying the respective parameter, ceteris paribus. In Figure 7a, for the south facing 45 degrees roof tilt, the optimum system tilt is approximately 34 degrees, whereas in Figure 7b, the optimum south facing orientation is directly south facing or 0 degrees.

[Insert Figure 7 about here]

A literature search for the common warranties for degradation of solar PV panels showed that of 23 manufacturer's of crystalline silicon (c-Si) PV panels available in North America, 5 indicated 20 year warranties for 80% performance and the rest gave 25 years (Brearley, 2009). Thus the worst case degradation (dr ) before a manufacturer replacing a panel is 20% over 20 years which is assumed to be 1% maximum power output decrease (or degradation) per year for calculation purposes as of the end of 2009. In a study by Scokzek et al.(2008), this trend in common warranties was confirmed with 65.7% of the panels being tested exceeding the criteria, degrading at less than 1% per year. The worst case degradation and a better degradation of 0.2% per year (Realini, 2003) were used for the initial investment analysis to show the effect of degradation. Figure 8 illustrates the cumulative cash flows with and without degradation. After completing the financial analysis for a 20 year period, the IRR and paybacks are summarized in Figure 9, without accounting for taxation as yet.

[Insert Figure 8 about here]

[Insert Figure 9 about here]

With the worst case degradation, the solar PV system under the Ontario FIT would have an IRR of 7.6% and payback period of 9.8 years without taxation. This is probable for a low- income individual. However, if average combined taxation is considered, the IRR is reduced to 5.03% and payback period is increased to 12.14 years. Depending on jurisdiction and individual Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325 circumstances, depreciation and other tools may be used to improve the taxed investment returns. It is in the best interest of tax policy to make the FIT income non-taxable for residential application to obtain loans where the IRR is equivalent or higher than the interest rate offered by the P2P lenders. It is also important to note that the environmental benefit of a 1 kW PV system in Kingston is an annual GHG reduction of 0.27 tonnes of carbon dioxide emissions which is equivalent to the carbon sequestered by 6.3 tree seedlings grown for 10 years (RETScreen Analysis). As mentioned before, increasing the deployment of PV will drive down their overall cost via economy of scale (Pearce, 2006; Pearce, 2008). Redoing the analysis for a range of system costs per Watt ($/W) for the PV system quantifies the better investment outcomes from decreasing system costs (summarized in Figure 10).

[Insert Figure 10 about here]

Sec. 4.2.1 noted that the maximum loan amount (e.g. $25,000) would not allow PV system optimization and full benefit from the FIT programs. Optimization of the RET entails utilization of the maximum area possible for the property, such that the largest possible capacity would increase energy output, earnings and environmental benefits. Redoing the analysis for a range of project capacities illustrates that for Ontario while making the very conservative assumption that panel costs remain constant, the investment outcome is better the larger the PV system used (Figure 11). As expected, the upfront costs are greater. However, higher IRRs, shorter payback periods and better environmental impact make the greater investment beneficial.

[Insert Figure 11 about here]

5.2.2 Using P2P mechanisms to fund Rooftop PV All of the P2P models introduced in Sec. 3.1 can be modified to include investment in RET deployment with the innovative terms and framework outlined in Sec. 4. Figure 12 illustrates the loan details under each P2P model, noting the effect of taxation on the revenue for the lenders and borrowers and modeled with traditional loan repayments via the holding account. Then the potential of using the account as an annuity is detailed. Recall that the project IRR is 8.6% and IRR (a-t) is 6.0%, not accounting for degradation. Note that the loan terms are all 20 years, with the exception of the Kiva (time required to repay loan based on FIT income) and Wokai (donation with no repayment) models.

[Insert Figure 12 about here]

All the models are able to fund the PV system over a long loan term at reasonable interest rates, with the main difference being the borrower’s income bracket that is targeted. However, in the case of the Prosper model, if the income from the FIT is taxable, then the borrower loses money which is not desirable. Thus either a lower interest rate, like 5 %, or making the FIT income non-taxable would be needed. If the residential FIT income was non-taxable in a new tax policy or under the Green Energy Act, then the worst case degradation IRR of 7.6% could allow Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325 even a 7% loan to provide revenue for the borrower. Recalling Figure 11, loans at higher interest rates could be offered for larger systems that receive a higher IRR. If the P2P-FIT-RET is made as an educational savings or retirement plan, the loan repayments would remain in the holding account, collecting a specified interest rate for the account and repaid/surrendered at the end of the loan term. The money the borrower receives does not change, but this increases the returns for the lender, ensuring that lower interest rates to the borrower are still worthwhile. Using the MicroPlace model as an example, a simple annuity analysis (Leblanc et al., 2007) is made assuming that the holding account is in a bank fund that has higher interest rates since the money will not be withdrawn for 20 years. Figure 13 summarizes the effect of the holding account interest rate on holding the repayments for 20 years. The last row represents the total lump sum repayment received after 20 years and an initial investment of $9,835 in the RET. This novel combination ensures high returns for the lender and low interest rates for the borrower, but would require modification of current accounting methodology. These conditions, however, are exactly what is needed for RET micro- entrepreneur growth.

[Insert Figure 13 about here]

6. Discussion of P2P-FIT-RET Framework Combining P2P lending platforms with FITs for renewable energy technologies offer several advantages over traditional financial institutions. However, certain challenges and limitations are also present and require careful consideration.

6.1 Advantages of the Framework The advantages of a P2P-FIT-RET system for lenders include choosing their investments and social/environmental causes and the ability to make very small investments while earning a rate of return on the investment as shown in Sec. 5. For those lenders that cannot fund an entire RET system themselves, or do not have an appropriate dwelling, they are able to help other RET projects through P2P lending. Investing in RETs will be even more desirable with the potential of carbon credit markets or tax deductions that may be available in the future (TFS Green, 2009). For low-income borrowers, a major advantage will be being able to find loans when they otherwise could not, and have a quantifiable reduction in GHG emissions and the associated environmental and social benefits from having the RET. In the case of middle- income borrowers, the P2P lending may afford them the ability to maximize the RET they deploy (Figure 11).

6.2 Limitations of the Approach and Possible Solutions Sec. 4 and 5 discussed the general requirements for the innovative P2P mechanism needed to take advantage of RET FIT programs around the world. Some limitations in the analysis were mentioned which included fees, risk of loan default and inflation. P2P lending platform fees vary depending on the model. In most cases, it is a small fraction of the earnings, but should be considered before an investment is made. Fees could be reduced or removed for those investors that choose to hold the money in the holding account for the loan term. The Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325 justification is that the bank or the P2P platform could use the money for reinvestment before repaying the interest after 20 years. Once global access is granted in the P2P lending framework, the common transaction currency and access to currency will need to be developed. In the case of loan default, several methods of increasing accountability were suggested in Sec. 4.2. However, the possibility of fraud still exists as with any business venture increasing potential financial risk. An unforeseeable problem is if the borrower should claim bankruptcy or insolvency so that they may not be able to repay their lenders. The affect on the ability to pay depends on the level of bankruptcy.10 Again, social networks and recommendations can assist with verifying the validity of borrower ambitions. When investing, the risk of the investment and general investment and borrower research should be done to avoid being victim to a scam. For the calculations, the effect of inflation was disregarded for simplicity. Inflation varies between countries and can mean the difference between a failed or viable investment. Local inflation is usually known for the lender and the use of nominal IRR is good enough to compare against nominal loan interest rates. However, when currencies are exchanged and projects are done in other countries, the inflation rates and their relative difference should be acknowledged. Countries with hyperinflation should be avoided. Thus differences in economic systems and status between countries may be a barrier to replication in every FIT jurisdiction. The technological risk is abated by the use of certified technicians for installation, certified electrical systems and manufacturer’s warranties that are equal to or exceed the loan term. Administrative and political risks are more difficult to accommodate because of unpredictability. A common concern would be if the energy laws and tariffs were abolished. Some certainty exists in the fact that all the countries mentioned have required RET deployment targets, and should therefore maintain policies to support the endeavor. Risk is further mitigated by countries or regions with solar access laws, such as the California Solar Shade Control Act11, which guarantee that solar projects will not be shaded by trees or new buildings if built and located according to code. Solar access law is another suggested policy requirement when considering solar PV projects in all jurisdictions. The tax rate used was an example of the effect of taxation on the investment and the calculations would need to be redone for each individual’s tax bracket under their appropriate jurisdiction, as well as local tariff and prices. Regardless of the individual's income it is clear that taxation has an adverse effect on the investment returns and that adjustments to energy laws or tax policy could make residential RET income exempt or given tax credits to aid RET deployment. As RET deployment is beneficial for a jurisdiction, at the very least, the investment in RET should qualify for sustainable investment tax credits. The use of parallel metering12 for connection of the RET to the grid, can guarantee that even if a homeowner with PV on their roof fails to make their utility payments and is disconnected, the panels will still generate electricity that is fed to the grid (and therefore income). By paying into an account separate from the one of the individual who installed PV on their roofs, default is avoided. To be able to take advantage of the FIT program, the homeowner would need appropriate access the jurisdiction’s electrical grid. Grid capacity and transmission distance constraints may prevent some places from participating in such a program. Not all homes may get grid connection due to limits on grid capacity and preference to other potential commercial RET projects in the area. Charity and other investment measures through microfinance could assist in Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325 establishing off-grid RET projects that do not fall under FIT contracts. However they are beyond the scope of this paper. The disadvantages of the P2P-FIT-RET system include i) potential diversion of funds from some developing countries in favor of countries with FITs, ii) diverting funds to RETs in only locations with FITs may crowd those sectors while leaving other locations underfunded, iii) more difficult to police than a normal loan, iv) potential diversion of funds from needed expenses in low-income homes (such as education) in order to generate revenue and v) without collateral investors would assume a greater risk of default. An additional policy risk, apart from the longevity and economic sustainability of the FIT program is if the program is over- subscribed than can be administratively handled. This may have negative effects on policy directives and economic development if suppliers and consumers become frustrated. Furthermore, it would mean an early end to the policy or program. In addition, recent policy research has shown the effects of dynamic life cycle analysis on carbon neutral growth rates of RETs, which should also be considered for setting national policies (Kenny et al., 2010). In addition, in the case of increased investment from other countries, there might be local political backlash since the benefits of the FIT program is extending to foreign markets and not the local economy. The opposite might happen where a country prolongs a FIT to get foreign investment when the program was no longer needed leading to unsustainable gains. In addition, regulation will be needed to protect individuals from undue coercion should they be unable to repay their loans especially if the terms are unreasonable (if unregulated) or if individuals, as is the case with MF, have multiple loans simultaneously. Furthermore, the P2P lending platform, being web-based would need protection from malicious hacking, potential fraud through individuals with multiple aliases and increased costs as it becomes a highly complex network.

7. International Deployment and Scaling Through the reports referenced in Sec. 2 it is possible to follow the FITs around the world. RETScreen, SAM or similar software packages (Nosrat et al., 2009) are available for use in any country, allowing the basic income and performance calculations presented in Sec. 5 to be completed. RETScreen is currently used in over 200 countries and is free to access via the Internet. Given these tools and the potential to use P2P lending as a financing mechanism, the general public can assist with international RET deployment. It should be noted that differences in economic systems (taxation, inflation and currency), extent of the FIT policy and local RET prices and expertise will affect the replication ability of the projects and return through the FIT- RET-P2P network. However, once P2P lending platforms give global access to FITs with appropriate modification, it is expected that investors will swarm towards RET investments in those jurisdictions with FITs similar to Ontario’s, enhancing their deployment. Harnessing over CAN$ 200 billion in the worldwide unsecured loans market (Gartner Inc., 2008; EFMA, 2008) will be a potential for investing in RET manufacturing facilities. Achieving economies of scale in these facilities would continue to decrease RET costs and improve IRRs for P2P-RET investments as indicated in Figure 10. Finally, P2P loans could be used to guarantee loans for RET companies that may be able to repay their loans faster than in cases of residential or micro- entrepreneurial installations.

8. Future Work Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325

This paper has shown how a P2P lending platform could be coupled to FITs in order to accelerate RET deployment while also distributing the economic benefit throughout the population. Future work is needed to expand the numerical case study provided here to other FITs, particularly those that are beginning to appear in the developing world. For example, Ugandans have just launched a program they call a Renewable Energy Feed-in Tariff (REFIT) following South Africa and Algeria with early FIT programs (ERA, 2011). Additional work could also focus on reviewing current green investments through P2P networks such as the tagged 'green' loans in Kiva. In addition, a new not-for-profit organization has just been formed and launched (2010) called Energy in Common (EIC, www.energyincommon.org), which is the first organization to enable microloans specifically and only for renewable energy technologies, and provides an ideal platform to test this model. EIC operates very similarly to Kiva, but specifically focuses on purchasing renewable energy systems like solar photovoltaic panels. What makes EIC particularly unique in the microfinance non-profit sector is that they have created a model to measure the greenhouse gas emission reductions that are created by their loans (EIC, 2011). The EIC model helps provide funding to developing world entrepreneurs for energy solutions and also helps to channel additional funding into mitigating climate change. There model could be extended to the P2P-FIT-RET model in order to expand both the size of their loans, their environmental impact and help ensure the financial sustainability of the organization as the RET returns are generally much higher than those seen in standard microfinance. For an organization like the EIC to pilot test the model the details on the microfinance institution would need to be documented and risks to the organization and their clients would need to be quantified and examined.

9. Conclusions Feed-in-tariff policies assist renewable energy technologies in being worthwhile financial investments. As the example for Ontario indicates, such investments provide IRRs between 4% and 15% depending on deployed size and taxation rate. The long-term nature of the FIT contract requires longer-term repayment plans than are currently offered. However, low credit risk mitigation arises from the nature of the contract, and a policy that would force loan repayment as the first priority would offer additional security to mitigate risk to the lenders. Peer-to-peer lending platforms, with some adjustment, provide an ideal system to allow micro-entrepreneurs with little or poor credit history to qualify for the favorable loan rates that would allow them to deploy RETs on their properties and thus offer a potential benefit to governments that have already identified FITs as a pragmatic policy instrument. This mechanism enables government policy to reach its full potential by including lower income families in RET deployment both on the financing and physical deployment fronts.

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Acknowledgements The authors would like to acknowledge H. Nguyen and A. Nosrat for technical assistance and Natural Sciences and Engineering Research Council of Canada for funding of this work. The authors would also like to thank P. Durand for helpful discussions; as well as C. Law, T. Carpenter and M. Pathak for reviewing the manuscript. Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325

Endnotes [1] Organizations: ● Community Lend (2006) : http://www.communitylend.com/ ● Kiva (2005): http://www.kiva.org/about ● Lending Club (2006): https://www.lendingclub.com/info/how-social-lending- works.action ● Microplace (2006): https://www.microplace.com/learn_more/howitworks ● MYC4 (2006) : https://www.myc4.com/About/WHAT_IS_MYC4 ● Prosper – Prosper (2005): http://www.prosper.com/welcome/how_it_works.aspx ● United Properity (2008) : http://www.unitedprosperity.org/us/how_up_works ● Virgin Money (2001/2002): http://www.virginmoney.com/worldwide/ ● Wokai (2006): http://www.wokai.org/f/about/index.php Current restrictions apply to where these organizations operate their lending and borrowing market. All websites accessed in July 2009. [2] Green Loans for Green Home Improvement http://www.prosper.com/loans/personal/green/ [3] The Toronto Renewable Energy Co-operative (TREC) is a non-profit, co-operative, environmental organization. Community power co-operatives are organized to develop local member-owned co-operative renewable energy projects. Visit: http://www.trec.on.ca/ [4] Registered Educational Savings Plan in Canada. RESPs allow parents, friends or family members to put money away in a special savings account that will only become accessible when the child enrolls in a post secondary educational program. More information available via http://www.hrsdc.gc.ca/eng/learning/education_savings/public/resp.shtml [5] An escrow account is a third party holding account. In a waterfall payment scheme, the highest priority investor is paid first, followed by the next highest priority investor and so on. [6] Technical Abbreviations: W: Watt – measure of electrical power kW: kilo-Watt which is 1,000 Watts (1,000 W). Used to describe the power capacity of an electrical generator kWh: kilo-Watt Hour – measure of electrical energy used MWh: 1,000 KWh ¢/kWh: Cents/Kilo-Watt Hour (A rate for sale of electricity used by the utility) [7]Detailed rules and program details for the Ontario FIT program can be found at http://www.powerauthority.on.ca/FIT/ [8] RETScreen is a decision support tool provided by Natural Resources Canada (NRCan). This is free software that can be used globally to evaluate energy production, emissions reductions, financial viability and risk involved for various types of renewable energy technologies (RETs) based on average local metrological data. [9] The analysis is done at nominal rates without accounting for inflation, since loan interest rates are also at nominal interest rates. All dollars are in Canadian Dollars unless specified otherwise. [10] Bankruptcy in Ontario, 2009 http://www.bankruptcy-ontario.org/0ntario_exemptions.htm [11] California Solar Shade Control Act, California Codes, Public Resource Code Sections 25980-25986. The California Public Resources Code can be found at http://www.leginfo.ca.gov/calaw.html Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325

[12] Parallel metering: Uses two meters wired in parallel to track the flow of energy into and out of the home. The disadvantages and advantages of this metering system can be discussed with the local utility and varies depending on jurisdiction. Published as: K. Branker, E. Shackles & J. M. Pearce (2011): Peer-to-peer financing mechanisms to accelerate renewable energy deployment, Journal of Sustainable Finance & Investment, 1:2, 138-155. http://dx.doi.org/10.1080/20430795.2011.582325

Figures

Figure 1. Jurisdictions in the World with Feed-in Tariff Programs Illustrating Their Average Annual Solar Irradiation. Sources: FITs adapted from REN 21 Global Status Report 2009 and Gipe 2009. Figure 2: Differences between MF and P2P Financing Microfinance* Peer-to-Peer§ Target recipient income Low/No income Any bracket Returns to investor Low/No returns Variable up to market Services offered All financial services Lending only Facilitated by MF Organizations Internet platforms Examples Sarvodaya Economic Enterprise Microplace, Kiva¥, Development Services, Grameen Bank, Prosper, Communitylend Non Governmental Organizations and (see Table 2) Self Help Groups† Sources: *Ledgerwood, 2000; CGAP 2002; Counts 2004; Godquin, 2004; Fehr and Hishigsuren, 2004 † Fehr and Hishigsuren, 2004; Crabb, 2008 § Pritchard, 2005; Lai and Turban, 2008 ¥ Some groups such as Kiva can be considered both MF and P2P Figure 3. Summary of examples of P2P lending platforms

Business Direct/ Organization Role Motivation Interest Fees Loan term Model Pooled Kiva 6-12 MF IntermediaryNon-profit None Both No (2005) months Social Variable/ MYC4 Profit 6-24 Invest Intermediary depends on Both Yes (2007) maximization months /MF/auction risk Small return Microplace Social Invest/ < 1 year to Intermediary(i.e. social1%-6% Pooled No (2006) MF >3 years invest) Market Prosper Marketplace/ Profit rates, Intermediary Both Yes 3 years (2006) auction maximization depends on risk Market Lending Club Profit rates, Marketplace Intermediary Both Yes 3 years (2007) maximization depends on risk Market CommunityLendMarketplace/ Profit rates, Intermediary Both Yes 3 years (2006) auction maximization depends on risk Fixed Fixed Social Virgin Money Profit Between Between Lending Facilitator Both Yes (2001/2002) maximization family and family and service friends friends United MF/ Prosperity loan IntermediaryNon profit None Pooled No variable (2008) guarantor Wokai MF/ donationIntermediaryNon profit None Pooled No N/A (2006) Sources: Ashta and Assadi, 2008 and Company Websites. See endnote #1 for links to Company websites. Feed-in-Tariff (FIT) Country A Directed lending Holding/ Escrow 1 Account

Lender 2 Solar PV Panel Country A financed by P2P loan Borrower Individual or Global P2P Lender Co-op Lending Platform Country B Country A

Recommender (improve online Lender trust) Third Party Country C Verification of Online Solar PV Dealers & PV project posting Installers

Legend: Money Transfer Information Transfer 1 Primary Flow 2 Secondary Flow

Figure 4. Schematic of General P2P – FIT – RET Network with a Rooftop Solar PV System

Figure 5. Total Costs for 1 kW6 PV system in Kingston, ON Item Cost (2009) Site investigation & design $300* Cost of system and installation $8,500* § Average Connection Cost (LDC) $ 975 Insurance Premium $60/year† Total Loan (100% value + first premium) $9,835 *Average from 3 Kingston, ON retailers ($8.50/ W) (2009) §Estimate from Local Distribution Company in Kingston. Depends on location.(2009) † Average from 3 insurance quotes for panel value as addition to home insurance Figure 6. RETScreen Inputs for a 1 kW system Parameter Value Units Notes Analysis Climate Data Location Kingston, ON Project Type Power Technology Type Photovoltaic Grid Type Central Grid Analysis Type Method 2 Resource Assessment Solar Tracking Mode Fixed Slope 45 Degrees Azimuth 0 Degrees Photovoltaic Type mono-Si Power capacity 1.00 kW Manufacturer Sharp Model Mono-Si - NT-185U1 185W x 6 = 1,110W Efficiency 14.2% % Solar collector area 7 m² Inverter Efficiency 95.0% % Capacity 1.0 kW System Summary Output Capacity factor 15.8% % Electricity exported to grid per year 1.380 MWh Output a)

b) Figure 7. a) Sensitivity of solar energy output to angle of roof tilt and b) sensitivity of solar energy output to south orientation. Figure 8. Effect of Degradation on Cumulative Cash Flows for 1kW PV System Figure 9. Showing the Effect of Degradation on the Investment Payback Period IRR (a-t)* Payback Period (a-t) Case Summary IRR (%) (yrs) (%) (yrs) No degradation 8.6% 9.4 6.03% 11.44 0.2% degr./yr 8.4% 9.5 5.83% 11.57 1 % degr./yr 7.6% 9.8 5.03% 12.14 Notes: *(a-t) denotes calculation after income tax is included assuming a 16.9% rate and a 1 kW system

Figure 10. showing effect of reduced initial cost rate on IRR* Installed Cost ($/W) IRR IRR (a-t) Payback Period (a-t) (%) (%) (years) 10 6.7 4.3 13.3 9 7.9 5.4 12.0 8.50 8.6 6.0 11.4 8 9.3 6.7 10.9 7 11.0 8.2 9.7 6 13.0 10.0 8.5 5 15.6 12.2 7.4 *Based on 1kW system

Figure 11. Effect of increasing system capacity on IRR Annual Payback Payback IRR Carbon Capacity Initial IRR Period Income Period (a-t) Dioxide (kW) Costs (%) (a-t) via FIT (years) (%) Reduction (years) (tonnes) 1.0 $ 9,835 8.6 9.4 6.0 11.4 $1,107 0.27 1.4 $13,259 9.1 9.0 6.5 11.0 $1,549 0.38 2.5* $22,675 9.7 8.7 7.0 10.6 $2,767 0.68 4.0* $35,515 10.1 8.5 7.3 10.3 $4,427 1.08 10.0* $86,875 10.4 8.3 7.6 10.1 $11,067 2.70 Notes: * Possible Retailer discounts for larger systems will further increase IRR. Constant cost rate of $8.50/W (2009) assumed although larger systems are less costly per Watt. Figure 12. Loan details under different P2P lending models P2P Lending Model * Virgin United *** Kiva Microplace Prosper Wokai** Money Prosperity Loan terms Loan Amount $9,835.00 $9,835.00 $9,835.00 $9,835.00 $9,835.00 $3,278.33 Years of Loan 12 20 20 20 n/a 20 Interest rate (%) 0.0 5.0 7.0 5.0 0.0 0.0 Yearly FIT income FIT income w/o degr. $1,046.70 $1,046.70 $1,046.70 $1,046.70 $1,046.70 $1,046.70 FIT income (a-t) w/o $860.00 $860.00 $860.00 $860.00 $860.00 $860.00 degr. Loan Repayment Monthly Payment $68.30 $64.92 $76.25 $64.92 $0.00 $0.00 Yearly Payment $819.58 $779.00 $915.00 $779.00 $0.00 $0.00 Total Payment $9,835.00 $15,580.00 $18,300.00 $15,580.00 $0.00 $3,278.33 Total P2P Interest $0.00 $5,745.00 $8,465.00 $5,745.00 $0.00 $0.00 Earned Total Borrower $2,725.40 $5,354.00 $2,634.00 $5,354.00 $1,046.70/yrn/a revenue Loan Repayment (a-t) Monthly Payment $68.30 $64.92 $76.25 $64.92 $0.00 $0.00 Yearly Payment $819.58 $779.00 $915.00 $779.00 $0.00 $0.00 Total Payment $9,835.00 $15,580.00 $18,300.00 $15,580.00 $0.00 $3,278.33 Total P2P Interest $0.00 $5,745.00 $8,465.00 $5,745.00 $0.00 $0.00 Earned Total Borrower $485.00 $1,620.00 -$1,100.00 $1,620.00 $860.00/yr n/a Revenue Notes * Model includes revisions needed and excludes actual company fees and geographical constraints. If there are fees for the transactions, it would reduce the interest or revenue earned and should be considered for an actual investment. ** Wokai model is a tax refundable donation, not an investment *** United Prosperity Model is a loan guarantee to get a larger loan, and is repaid when the larger loan is repaid. Degradation is not accounted for in this analysis for simplicity. Loan calculations are standard at nominal interest rates. Interest rates given are an example modeling the motivation of the given models as given in Table 2. Figure 13. Effect of Holding Account Interest rate on Holding MicroPlace Model Payments for 20 years Holding Account Yearly Interest rate (%) 2.00 3.00 5.00 8.00 10.00 Yearly Payments to account $779.00 $779.00 $779.00 $779.00 $779.00 Holding Term (years) 20 20 20 20 20 Total Payments into account $15,580.00 $15,580.00 $15,580.00 $15,580.00 $15,580.00 Without Holding Total P2P Interest Earned $5,745.00 $5,745.00 $5,745.00 $5,745.00 $5,745.00 With Holding Total Held after Interest Earned $18,927.65 $20,932.02 $25,758.38 $35,648.57 $44,617.22 Total Additional P2P Interest Earned $3,347.65 $5,352.02 $10,178.38 $20,068.57 $29,037.22 Total P2P Interest Earned $9,092.65 $11,097.02 $15,923.38 $25,813.57 $34,782.22 Note: Yearly payments to account are from FIT income of $779 from Table 8.