Expert opinion piece by Max Crowdfund CEO Felix Berkhout
My belief is that, as the green energy sector inevitably grows, and crowdfunding simultaneously increases in popularity, these two emerging sectors flying in parallel to each other will inevitably collide in a significant way(1).
The European energy market is in a state of crisis, enduring rising prices caused by the economic fallout of COVID, extreme climate conditions and the Russia Ukraine conflict. The European energy sector must evolve if it to meet the consumption of its citizens, relying more on renewable sources and moving away from fossil fuels. The European green deal plays a major part in this transition which can be felt by a rising number of green energy projects emerging in the market. Currently, these projects are being funded by combination of grants, private equity and alternative finance, as well as traditional institutions such as banks. The power of crowdfunding is beginning to be understood by the global population whilst communities are taking matters into their own hands, reflected in an upward trend in green projects being crowdfunded.
Investors are showing interest in projects with sustainability elements, considering factors that are not purely financial when making investment decisions. Crowdfunding platforms that stay ahead of this curve are likely to onboard more investors as well as attract interesting development projects whilst positively contributing to a more sustainable future.
European Energy
The European Union has experienced a spike in energy prices over the last year: In Q3 of 2022 the European Power Benchmark was 339 €/MWh, a whopping 222% higher than Q3 of the previous year. Rising gas prices, reduced production of nuclear power and a suffering wholesale electricity market have contributed to a considerable rise in energy prices in most markets across Europe. Retail electricity prices for household consumers in European capital cities were 49% higher in November 2022, compared with the same month in 2021.
In the last quarter of 2022, nuclear power output levels shrank by 41TWh, alongside hydropower generation that decreased by 17TWh. This caused fossil fuel generation to increase by 24Twh despite high commodity prices, whilst solar generation grew by 16TWh and onshore wind rose by 4TWh. In total, renewables reached a market share of 49% by Q3 of 2022(2).
In order to save the energy market, intervention policies were required and introduced in the form of: revenue caps on inframarginal electricity producers, demand reduction measures and the European green deal.
European Green Energy Policies
In December 2018, the EU adopted a directive(3) on the promotion of the use of energy from renewable sources, in order to meet the 20% target set for 2020. The Commission then proposed amending the directive in 2021 when presenting Europe’s new 2030 climate targets to increase to at least 40% renewable energy sources by 2030. In 2022, following the war in Russia, the Commission decided to accelerate the clean energy transition and published the REPowerEU plan; a series of measures with the aim of saving energy, producing clean energy and diversifying the EU's energy supplies, and to reduce the EU’s dependence on Russian fossil fuels. The Commission further proposed to increase the renewable energy target in the European directive to 45% by 2030.
European Green Deal
The European Green Deal objective is to become the world’s first climate-neutral continent by 2050. The measures, which were presented on the 11th December 2019, have been criticised for being overly ambitious whilst also presenting many potential benefits, both economic and environmental. The Green Deal is an important part of Europe’s strategy to adhere to the United Nation’s 2030 Agenda and sustainable development goals.
The Green Deal includes a reduction in greenhouse gas emissions, a decrease in the adoption of fossil fuels, investment in innovation, natural preservation, and a marked increase in the adoption of renewable energy sources. Importantly, the Green Deal is focused on sustainability, a low-carbon economy, social equality and fairness whilst this dramatic transformation is taking place(5). In addition to positive environmental impact, the use of renewable energy sources is likely to result in a sustainable and diverse energy supply and new job creation in emerging sectors.
Green Energy Project Growth
Wind and solar power have led the growth in electricity generated from renewable energy sources during the period 2011 to 2021 in the EU. Wind and hydro power accounted for more than two-thirds of the total electricity generated from renewable sources whilst the remaining one-third of electricity generated was from solar power, solid biofuels and other renewable sources. Solar power is the fastest-growing renewable energy source: in 2008, it accounted for just 1% of electricity production, representing a dramatic growth from just 7.4 TWh in 2008 to 163.8 TWh in 2021.
Green projects are not limited to electricity generation, but include everything from waste management and carbon sequestration to emission friendly vehicles and self-sufficient buildings that help reduce carbon emissions, waste and energy consumption whilst improving energy efficiency.
Financing Green Projects
Individuals, companies and public organisations are all discovering the importance of sustainable energy projects. This growing market is making use of traditional financing instruments as well as the development of new financial instruments specifically adapted to its requirements. The finance options available to green energy projects range from credit and equity funding, to grants and green bonds.
Bank credit is usually adopted for shorter term financing, to provide working capital in the form of construction loans (for refurbishing a property to make it more energy efficient for example), or conventional loans (for the purchase of a biomass boiler for example). For longer term loans, promoters may obtain funds by increasing a company’s share capital, approaching business angels (whom also add expertise in many cases) or applying to specialised investment funds that focus on energy efficient operations. Private, public and public-private investments funds are appearing across Europe for these types of projects. Green bonds are debt alternatives backed by assets and awarded to projects with a demonstrable sustainability standard. Investment through Energy Cooperatives offer cooperative members to pool resources and invest in renewable energy projects earning a fixed or variable interest rate, or a share of profit from the project itself. Special Purpose Vehicles (SPV) are an option most adopted when a project has run out of self invested funds. An SPV is set up to take on the project debt and finance a determined project, providing the capital for the operation. The profits are shared between the promotor and the SPV. Specialised Revolving Funds specialise in energy efficiency and renewable energy projects offering loans that are replenished on a regular basis when the receiver of the loan returns proportions of the loan to the fund. These type of funds are usually provided by public authorities in specific areas is order to promote local energy efficiency. Subsidies and Non-recoverable grants are also available from public authorities in order to provide financial support to energy projects, commonly adopted in early stage projects with socio-economic benefits or as a part of development plans in certain regional areas. An example of this in the EU is the European Regional Development Fund (ERDF) which is a financial instrument provided by the European Commission in order to promote sustainable employment, infrastructure, regional development etc. Another example is the European Agricultural Fund for Rural Development (EAFRD) which provide co-financing for sustainable energy projects in developing regions.
Some important barriers to financing energy efficiency or renewable energy projects in the EU are a lack of standardisation across Europe and the the lack of cross-sector knowledge at technical and financial levels. The European Commission has established a finance mechanism stemming from article 33 of the Governance Regulation (EU) 2018/1999 of the Clean energy for all Europeans package, which has been in force since 2020, to encourage Eu countries to cooperate and meet EU wide targets. Private investors are able to participate by paying into the mechanism in order to boost their company’s sustainability profile. Benefits are received in the form of guaranteeing a clean energy source or reducing a company’s carbon footprint, rather that receiving a financial return. Project developers receive grant awards that will fund projects that contribute to national targets for both the contributing and hosting countries. In other words, one country pays for a project, another receives the money and both gain the benefit of meeting renewables targets, thus creating a cross border cooperation(6).
Crowdfunding Renewable Energy Projects
Whilst there are many forms of finance available to renewable energy project developers, they can be expensive and time consuming to achieve. One of the main advantages of crowdfunding as an alternative finance method is the speed and ease with which funds can be obtained by project developers. The benefits provided to investors range from financial returns, to a share in a green product, to renewable energy provision. In either scenario, crowdfunding brings together like minded people with a desire to facilitate cleaner, more sustainable energy resources for Europe.
Additionally, new renewable energy projects such as solar or wind farms require significant upfront investment to secure initial installations. The amounts required can make it challenging for project developers to fund them from a single source. Crowdfunding provides a method of raising funds from a pool of supporters who can each contribute small amounts to a commonly desired projects.
As a result, crowdfunding has already become a popular method for renewable energy projects to secure funding. In 2022, sustainability and green energy offerings were hosted by 22% of platforms surveyed in a report created by Crowdspace. In the same report, it was proposed that crowdfunding investors are increasingly using sustainability factors to make investment decisions, and not just financial factors. While high budget energy projects generally require heavy government backed funding, sustainable energy initiatives can be supported by climate conscious investors, making crowdfunding a great fit.
The global crowdfunding market is expected to grow at a rate of 16.2% to reach USD 5.53 billion by 2030 according to crowdfunding analysis reports. It is a natural trajectory for this growing investment space to align with a booming development market, and my prediction is that crowdfunding will become a popular method of finance for renewable energy projects.
Sources (footnotes)
1 This article is an opinion piece based on research and should by no means be interpreted as investment advice or taken as fact. All third party sources have been referenced and I am not responsible for their accuracy.
2 https://energy.ec.europa.eu/data-and-analysis/market-analysis_en
3 Directive 2018/2001/EU
4 eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52019DC0640:EN:NOT
5 https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Renewable_energy_statistics
6 https://www.ecoserveis.net/wp-content/uploads/2021/05/Guide-to-Financing-of-Sustainable-Energy-Projects-2nd-edition.pdf
