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, 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 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