Industrialisation has had substantial negative effects on the natural environment, not the least of which being human-induced climate change. Use of renewable energy can help mitigate climate change, but its deployment faces several challenges including information gaps as well as market-based, social barriers, regulatory and financial barriers.

Crowdfunding softens the challenge of lack of capital

Environmental and otherwise sustainable projects often face difficulties attracting the necessary capital. Lack of access to capital thus presents itself as one of the greatest barriers to green financing generally. In an effort to get around the problem, entrepreneurs have started to seek part or all of their funding directly from the so-called “crowd” in the form of crowdfunding. Crowdfunding has been helpful in overcoming some financial barriers. As crowdfunding typically results in small amounts of financing spread over large communities, it also spreads the risk by allowing the financing of larger, more capital-intensive projects.

Debt-based offers model of choice for renewable energy crowdfunding

Of the variety of crowdfunding models out there including reward-based, donation-based, equity and a number of other variants, loan-based offers are those most widely used in sustainable energy crowdfunding.

Benefits of debt-based models for cooperatives

Cooperatives, which arguably can be viewed as more locally-based forms of crowdfunding, typically raise money to fund their own local projects and often operate on an equity-based capital structure. For a number of reasons, however, debt or loan-based models can also be attractive for cooperatives.

First at all, there is less risk in lending money via loans than in owning stocks. In the case of bankruptcy, for example, a lender will be paid before a stockholder. A business model’s specific level of risk will, of course, depend on various factors surrounding the specific sustainable energy project. These factors include the quality of management, a corporation's ability to pay its obligations due to changes in regulatory environment, revenue patterns of the sustainable energy project such as energy type and the presence of feed-in-tariffs.

Benefits of debt-based models for investors and project developers

Loans seem to be the common way to get funding for sustainable energy projects via crowdfunding platforms for a variety of reasons.

Some of the advantages of this business model for investors include:

• Access to small and medium companies
• Support of sustainable energy projects (a sense of doing good)
• Return on investment or interest
• Predictable long-term returns
• The ability to use assets such as solar panels, wind turbines, etc. as collateral
• Low-risk investments for projects with long-term contracts (feed-in-tariffs)
• A low performance correlation with other investments such as equity or commodity indexes, etc.

For project developers, loans have also some advantages:

• Investors do not acquire voting rights like stockholders
• Interest payments are deductible business expenses
• There is added leverage for equity owners

Loan-based offerings for sustainable energy projects clearly have many advantages and can help foster public involvement in and acceptance of sustainable energy. Citizenergy features a variety of such debt or loan-based projects at any given time – I encourage you to have a look!

By David Rodeiro-Pazos, Professor of Accounting and Finance, Universidade de Santiago de Compostela | www.usc.es/valfinap/contacto.html