Half the energy produced globally is wasted. Measures to address this situation such as making our buildings, lighting, transportation systems and industries more efficient, have long been regarded as the ‘low-hanging fruits’ in delivering a clean energy economy. There is a strong business rational for companies, as well as households, for investing in energy efficiency.
Energy efficiency measures cover a wide spectrum with all of them having their specific challenges. There are numerous factors contributing to the low uptake in the market such as split incentives, imperfect information, high transaction cost, and credit risk.
In contrast to investments in clean energy projects, energy efficiency measures are typically embedded in business operations or related to existing assets. Therefore the finance decisions are typically based on the overall credit rating of the borrower and not on the project cash-flow.
Similar to solar panel investments the biggest barrier to energy-efficiency measures is the upfront cost for a specific set of energy improvements which are repaid over time as energy savings are generated. The traditional route to financing for energy efficiency has been to seek bank loans, but banks have very little appetite for lending, in particular for smaller projects. Over the last few years new financial models, such as energy performance contracts or energy services agreements, have appeared. They give companies the opportunity to show energy efficiency measures on the income statement as “energy services,” rather than on the balance sheet as loans. So in the case of performance-based, off-balance sheet financing it is the service provider who faces the challenge of securing finance.
Investors on the other hand are sitting on the sidelines, waiting to get involved in efficiency projects, but they struggle to find the right deals which are scalable and generate deal volume.
Advantages of online marketplaces
As discussed in a previous post, crowdfunding is not a new asset class, it is a conduit of financial flows, which substitutes traditional loans, as well as any other asset class by facilitating direct investments. The disintermediation of the supply chain, as demonstrated in P2P lending, provides a lower cost of capital to the borrower as well as higher yields for the lender, compared to an investment of equivalent risk.
Crowdfunding has the potential to revolutionise the sector by bringing the entire deal flow process, from idea to financial settlement, online. A collaborative crowdfunding platform could bring together energy audit companies, building owners and managers, energy service providers, insurers, engineers as well as public sector organizations and investors. It creates a marketplace which reduces the ‘cost of information’ and enables stakeholders to administer deal flow efficiently, which reduces transaction cost. Furthermore it matches projects with investors that are looking for certain risk profiles. It also allows for integration of financing from multiple sources and it enables ‘warehousing’ or portfolio building and re-distribution of assets to institutional investors, such as pension funds looking for ‘impact’ investment opportunities on a large scale. Two small-scale private securitisations, as well as one rated securitisation, has already taken place on US P2P lending portals last year. This clearly demonstrates the potential of crowdfunding platforms and in which direction the market is going.
Crowdfunding Business models
The first crowdfunding portals in the sector are appearing. In the US we recently saw the launch of a crowdfunding site for retrofitting projects for homeowners and in Germany a portal for energy efficiency projects at small businesses was launched last year. Both portals currently operate an unsecured P2P loan model.
Crowdfunding can play a big role in efficiency finance and crowdfunding platforms can empower the industry to realize its tremendous potential, in particular in the small-to-medium sized commercial and industrial as well as the residential market segments. Direct investments could become the driving force behind unlocking the “fifth fuel” as energy efficiency is often called. Crowdfunding energy efficiency measures can make a strong contribution to economic growth, reduce air pollution and carbon emissions, increase economic efficiency and productivity and create jobs. The time to unlock the potential certainly has come.
Rex is an innovative banker with more than 15 years experience in retail banking, treasury and commodity trading at Commerzbank, J.P. Morgan and ABB Financial Services. Through his passion for entrepreneurship and new markets he got involved during the dot-com era in building up a business incubation unit for ABB, subsequently spinning off a company which pioneered the implementation of the European emissions trading scheme. He continued his career in the climate change sector first by joining EcoSecurties, a leading startup company in developing carbon reduction projects worldwide, and more recently as director in the environmental markets team of BNP Paribas.
Rex strongly believes that crowdfunding will cause a paradigm shift in the financial service industry and that it will make a significant contribution to the transition towards a sustainable economy. Born and raised in Germany, he gained a qualification as banker and a Masters degree in economics from University Hamburg. He currently lives in the UK with his wife and two daughters.