Crowdfunding for renewable energy can be enticing to citizens who want to invest in and make money from a collective purpose at the same time. Expert Sissy Windisch gives her advice to beginners
In 2016, for a few hours, all of Germany ran only on renewable energy, demonstrating that one day, the release of carbon dioxide into the atmosphere could really be avoided. The remarkable thing here is that a substantial amount of this energy was not produced by the large utilities, but by citizens who installed solar panels on their roofs, or who operated small wind farms on their properties.
Some of these plants were financed through crowdfunding, which allows roof space or available land to be turned into a profitable business. However, as in any type of investment, it has opportunities and pitfalls.
youris.com met Sissy Windisch, from the German company Green Crowding, who published a guide for new small investors, to allow them to make the best decisions. The document was released under the EU project CrowdFundRES.
Why did you see a need for writing these guidelines?
Many people who are not professional investors put a lot of time and effort into researching, analysing and comparing information before they invest. So we thought it was important to help them make an informed decision, and the best approach would be to write a guide so that they ask the right questions, not just about projects and platforms, but also about themselves. For example, do I understand enough to make this investment? We see more and more projects and crowdfunding platforms out there. So it’s just to help people navigate, and understand what they’re doing and that a platform must be regulated. Anybody can check these regulations among other things.
This is a different kind of crowdfunding, unlike what platforms such as Kickstarter do?
I’m glad you asked that question because there’s a lot of misunderstanding. With Kickstarter you donate money, so a comic book for example can be published, or you just want an artist to keep on creating art. Instead, the type of crowdfunding we are interested in is debt-based, which means that you get your money back plus interest. If you finance a solar roof on a school for five years, you get 3% every year and at the end of five years you get your money back. So this is an investment.
However, there is an aspect of debt funding that makes it similar to Kickstarter: you invest in something you have a strong interest in.
Totally, and it’s the power of the collective good. Even the Statue of Liberty in the United States was crowdfunded. People got together, gathered the money and funded something. And now with the technology you can do it online; you can do it more efficiently. And it’s basically a democratic approach. You don’t need an intermediary like a bank to make the investment decisions for you. You look around and then say: “I like that project and that’s what I want my money to work for.”
Could you tell us more about debt-based crowdfunding?
Debt-based funding is already one of the largest types of crowdfunding. I would say one of the biggest areas in terms of funding volume at the moment is real estate. I think for 2016 alone the funding was estimated at around 3.5 billion dollars. But other popular areas are projects with predictable returns, whatever the type of project. So they would include peer-to-peer lending; for example if I want to repay my credit card debt I could ask other people to lend me money. We see this evolving in more and more areas: small businesses, college loans, science projects, infrastructure… And green energy, which is quite popular.
Is the role of traditional funders, such as government agencies and investment companies diminishing?
I think that it’s a cultural thing. For example, in Germany cooperatives have always been important in financing small-scale solar energy. And if you look at all the renewables capacity in the country, I think more than 50% is in the hands of private people and farmers. The big utilities fund only a fraction actually, often the most prominent wind farms. Now with crowdfunding you have more projects that are opening up to the public. We see real interest in a lot of energy efficiency projects, such as LED street lighting. People look for technology they like and then they invest.
If a farmer wants to crowdfund a project, does he approach an intermediary like the company you work for?
Yes, that’s right. Basically, we put the farmer’s project online, onto a platform. The investors will find it via this platform, and then their offers will be facilitated via the platform. The money flows via an escrow account and then onto the farmer.
Why can’t the traditional financial institutions, such as banks or investment firms, offer these services?
What we’ve often seen, particularly for renewables, is that banks and other traditional financial institutions often look for large projects to invest in. They prefer investing in one 50-million wind park than in 500 small photovoltaic installations.
How does the yield from crowdfunded projects compare to that of banks?
It depends on the underlying technology, regulation and other factors. Here research is required before investing. Any return is related to risk, so if you look for a 10 percent return for a short maturity usually there is risk involved. It is important to understand the risks and related returns before investing. Thus, we set out questions in the guide in this respect. The main difference with banks is that you know that you have access to other type of investment opportunities.
What are the risks for investors in debt crowdfunding projects?
If you have those early-stage technologies and innovations, start-ups, you may make a lot of money but also it’s very possible to lose your money. It may make more sense to do it by equity, or by donations. It’s difficult for project owners of early-stage technologies to predict: “Ok, in three years, every year I will return your money plus interest.” There are certain websites that also finance early-stage green technologies, like high airborne wind technologies.
For projects with predictable returns, like PV roofs, it is very different. Energy production or savings can give predictable returns. Hence, debt makes more sense. There are many other risks to be aware of, i.e. the solvency risk, currency risk. For example, the project owner may go bankrupt and is thus unable to repay you.
Europe is still a mosaic of different legislations and business approaches. Is this also the case for crowdfunding?
Differences are big, and in Europe government regulations are the main factor. The British approach to crowdfunding is the most advanced. They have bespoke regulation, and as a result the whole market grew at a faster rate. In France it took them a lot longer to actually implement the laws, so it was delayed. Now the country is really picking up again. It has a new incentive: if you are a green energy producer, you can sell your electricity at a higher price if citizens co-invest. Germany used to have high feed-in tariffs, which was particularly beneficial for small-scale photovoltaic projects.
By Alexander Hellemans
16 January 2018
