Social, green, but primarily as an investment: all the features of energy crowdfunding
Platforms to raise funds for renewable projects want to take care of our planet and its inhabitants but often, they’re also looking for good returns.
There are three ways a crowdfunding project can be financed.
- lending: the entrepreneurs borrow money and pay interest
- equity: investors in the project become its shareholders
- donations: no reward is to be expected (there is also a fourth way, a mix of equity and lending called “hybrid”)
A lending crowdfunding project has a 90% chance of success according to the Review of Crowdfunding for Development Initiatives released in 2013 by Oliver Gajda and James Walton, two strategic consultants in innovative businesses. This percentage compares favourably against the 40% of positive results for both equity and donation projects.
In every field where crowdfunding has been used, these three models are commonly used. Energy crowdfunding is no exception. In a study (March 2016) by Chiara Candelise from Italy’s Bocconi University, the state of the art was captured: fourteen active platforms specifically dedicated to energy crowdfunding were financed through lending. They use debt instruments – mini bonds or invoice financing – to finance projects via third parties who have to be paid back for their capital and remunerated for their loans.
The second choice of platform creators is equity, which consists of investors becoming project shareholders. Six such platforms were active in March 2016 while others are on the way. The return on investment, which is more variable than in the previous case, is provided by dividend payments. Investors also have a right to participate in the activities of the entity, mostly in the case of cooperatives.
Five working platforms use the donation method, based on solidarity for communities and nonprofit renewable energy projects or for rural electrification, and is used mostly in developing countries. There is no financial return on this kind of project.
At the end of the list is the fourth way which is a mix of both equity and lending. These are called hybrid platforms where people can find both debt and equity projects.
Lending is not only the biggest part of the market, but also the most dynamic, as shown by very young projects like the French GreenChannel, which began its activity in late 2015. In January 2016, its first campaign was launched to raise money for a photovoltaic project. It successfully scraped up over €260.000 (116% of the amount required). The investment will yield an annual gross return of 4.5% over 9 years. A truly competitive return, given the current market conditions.
But are lending renewable energy investments generally profitable? Or are they more of a risk? “There is no absolute answer”, says Uwe Lebelt, in charge for business development at GreenChannel, “We take all due precautions and are careful in selecting only projects that can be sustainable.” But different risk conditions may be found on the market.
Nowadays, it is easier than years ago to obtain a return on investment since “the price of alternative energies has dropped. In Germany, for instance, a photovoltaic roof is cheaper than fossil power generation”, Lebelt adds.
Northern European countries have more efficient channels and laws, but southern Europe has greater potential “not in investment terms but in natural resources such as sun and wind. That is why we aspire to become a European platform”, he says.
Among the pioneers of this sector is Trillion, founded in 2011 in the United Kingdom. Principally loan-oriented, it has also featured equity projects.
According to CEO Theresa Burton, the platform is ready to support equity fundraising through its latest addition: YourBrandCrowdfunding.com. It offers a white-label crowdfunding service (Trillion provides its expertise for campaigns that are re-branded with the name of the customer) for medium-sized businesses which seek to crowdfund on their own websites.
“This allows them to engage with their current and potential customers in more meaningful ways, sometimes turning them into lenders or even partners”, she says, "So far we have enabled two companies to manage their own fully branded crowdfunding campaigns. Not only can they pay back in cash, but also with gift vouchers or reward points”.
As in other areas, the United Kingdom has a more liberal legislation. In countries like France and Italy, managing equity instruments requires a different license to the one needed for loan services, which means that hybrid crowdfunding is more complicated to set up.
According to Burton, "the ability to leverage crowdfunding will depend heavily on the local regulatory framework".
On donation platforms you don't give money to have a tangible return. Normally they sustain projects in developing countries. As the German Betterplace does, beyond its interests in the field of renewable energy.
There are also platforms directly created by some developing countries, as Indian Milaap, and others that try to combine a social role and business. An example of this type is the young Swedish firm Trine.
Hanna Lindquist, in charge of communications & customer growth, explains that she and her colleagues are sure that raising funds for clean energy projects in areas where they are needed “is really good business”.
The company, which raised funds for projects in countries like Kenya and Uganda, specialises in solar energy. “As a startup we need to make a choice about our market, and we chose one that is huge. However, when we grow we may consider other options. And the possibility is real because we are getting a lot of interest from investors”, she says.
According to Lindquist, there are more people interested in investing than there are projects worthy of being financed.