Cooperative loans and crowdfunding

Several new financing models are emerging to engage the general public in supporting social impact projects. They can be a GREAT fit for energy communities.

Equity crowdfunding, rewards-based crowdfunding and peer-to-peer lending (also known as debt crowdfunding) are becoming more popular in the social impact scene. All have the underlying aim of creating ways for individual citizens to contribute financially to projects with the expectation of receiving some type of return, which may be financial or non-financial. By involving ‘the crowd’, such approaches not only raise funds, but also boost community engagement and increase visibility of the project. Over time, they can build a strong base of supporters and advocates for a given cause.

In essences, these mechanisms empower many groups (including ECs) to finance their solidarity activities through small loans, rather than going to banks or turning to large investment firms. They are based on the concept that many citizens will agree to ‘invest’ whatever sum they choose, knowing up front what they will receive in return. The ‘payback’ may be that they earn some level of interest over a certain period and the capital they invested will eventually be returned.

Alternatively, they may acquire some share of ownership in the project or have some say in how profits will be used. An EC could, for example, use funds collected from investors to install a solar PV system on a building that houses a local charity, thereby facilitating self-consumption of clean, low-cost electricity. Over time, the charity can direct money saved on energy bills towards paying back the installation costs – and potentially have additional money to put into its community projects. Once the initial loan is paid back, ownership of the asset (the installation) can be transferred to the charity. In the meantime, investors have earned some interest and eventually had their capital returned (which many chose to re-invest).

High engagement of small investor can create more work

ECs need to be aware that such initiatives, while having high potential for positive impacts, require substantial effort (e.g. feasibility studies, operation costs, obtaining necessary permits and licences) that have to be built into project costs. Before approaching investors (or proposing the idea to a charity), the EC would also need to carry out technical and economic pre-analyses to assess potential rewards and associated risks. Seeking bids from PV installers would also be critical to estimating the project budget. All of this ‘pre- financing’ work is necessary to calculate the scope and funds needed.

Armed with a detailed project proposal, the EC can start building up a network of potential investors, having a good sense of how many they need at what levels of engagement. New ECs may find it challenging to attract investors. To boost credibility, some have found it helpful to secure ‘letters of intent’ from the charity, the selected installer, other potential stakeholders or early investors. The
distinction between such letters and actual contracts is important, as the letters can clearly state that the project will not proceed unless sufficient investment is secured.

Typically, once funding is secured and the project gets the green light, contracts are quickly put in place (based on the letters of intent) and works can proceed. The EC then holds responsibility for monitoring and maintenance for the installation to ensure it is producing at optimal capacity in line with the business model on which all agreements are based.

Another possibility is to set up a scheme that offers low-cost loans to energy vulnerable households that, for various reasons, are unable to access sufficient public funding to renovate their homes, replace old, inefficient boilers or install rooftop solar panels. Some ECs have been able to attract investors who are most interested in the value of social impacts and agree to accept lower financial returns as a means to direct additional funds towards implementing energy solidarity measures. Whatever the structure of the project and the crowdfunding mechanism, ECs must be clear about the type of investment they are seeking.

Equity crowdfunding or cooperative loans offer to investors ownership shares and associated future profits.

Debt crowdfunding is a simpler financial transaction, offering to investors interest on the amount loaned but no ownership. They must also be transparent about what a project failure would mean for investors.

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