When a wind turbine started spinning last year in the historic village of St Briavels on the border of England and Wales, it was a pioneering moment. For the first time, a renewable energy project had been built using the financial innovation known as debt crowdfunding. Ordinary people, many of them local residents, collectively raised £1.4m and now stand to gain from estimated annual returns of 6.7-8 per cent over the next 20 years as the turbine generates electricity.
The achievement was much more than simply another small step towards a decarbonized energy system in the UK. It signified the evolution of crowdfunding from a donation-based niche to an investment mechanism capable of delivering new, locally-sourced private finance to fund the energy infrastructure of the 21st century.
So how might the UK’s experience of crowdfunding benefit the developing world? Could the St Briavels model help to raise capital to deliver the UN’s objective of Sustainable Energy for All, and what barriers to its implementation might exist?
The St Briavels model
The St Briavels wind turbine was developed through a joint venture between a local farmer and the Resilience Centre, a social-purpose business. In contrast to the top-down approach so often associated with big utility companies in the UK, the proposal resulted from a genuinely inclusive bottom-up process, which in turn smoothed the path for planning consent.
At the same time, the project was designed to strike the right balance between specialist input and community involvement. This meant that the higher-risk development and planning stage was not led and financed by the crowd, but by specialists with the right experience and knowledge. Only later was the project opened up for community investment.
The £1.4m needed to finance the lower-risk construction and operational phases was raised by the sale of ‘debentures’. These are a well-established form of debt-product similar to a retail bond that give the owner the right to a proportion of the profits from the sale of electricity over 20-25 years. Investors bought the debentures through Abundance Generation, an online crowdfunding platform regulated by the Financial Conduct Authority. Once purchased, debentures can also be bought and sold ‘second-hand’ via an online bulletin board.
The opportunity to invest was opened up as widely as possible. Both locals and non-locals alike, as well as businesses, charities and trusts, were able to invest as little as £5. One local pensioner invested £20.
In this way, the project will create local economic benefits over the lifetime of the project. Many local people invested in the turbine so some of the money that would otherwise flow out of the economy through energy bills would instead be recycled back through investment returns. In addition, a ‘community dividend’ of £15,000 will be paid out for local projects each year.
Of course the investment was not risk free. Abundance debentures are long-term investments, returns are variable, and there is no guarantee investors will get back all of their original capital in the event of problems. However because wind turbines are a proven technology that receive a fixed index-linked price for the electricity they generate, such risks are reduced.
Decentralized finance in the developing world
Could the vision that inspired St Briavels provide some answers for how to raise the private capital needed to deliver universal energy access in developing countries?
Many thousands of rural villages in sub-Saharan Africa currently have no access to electricity. Stand-alone mini-grids (which provide centralised generation at the local level by combining renewable technologies with storage and/or diesel back-up) are likely to prove the most effective strategy for providing them with electricity in the future.
According to the International Energy Agency, achieving the UN’s goal will require US$48bn every year. Funding will need to come from private sources including local banks, private investors, and international investment funds. Currently, only a fraction of this is being delivered.
Decentralized finance has already emerged in the global South in recent years. But this has tended to fund only small-scale activities. Micro-lending, for example, provides amounts less than US$1,500 for ‘bottom of pyramid’ projects, rather than the millions of dollars required for community-scale mini grids, according to a recent European Capacity Building Initiative report (PDF).
And to date at least, those crowdfunding platforms that finance activities in developing countries raise funds from people in the developed world, ignoring the untapped potential of domestic private capital in Africa. Kiva, for example, has channelled US$400m in loans to developing country micro-entrepreneurs from 900,000 people mostly based in countries that are members of the Organization for Economic Cooperation and Development.
This means there is a need, and an opportunity, for models capable of aggregating domestic private capital to finance community scale energy infrastructure in developing countries.
Barriers to investment crowdfunding in developing countries
Is it really possible to access enough ‘local’ private finance in Africa to invest in mini-grid scale energy projects? After all, whilst Africa’s rural poor have a lot to gain by replacing kerosene lamps that can consume up to 20 per cent of their household income, they have little money to do so.
Crowdfunding both from local communities and other investors from across Africa will be key to achieving the economies of scale needed. The middle classes of Nairobi and Johannesburg, and entrepreneurs, businesses and farmers in wealthier countries like Kenya and South Africa, hold significant amounts of untapped capital and could all benefit from a viable low-risk investment.
In fact, this approach would be no different that the St Briavels project, which was funded by the local community and individuals living all around the UK.
But there are also likely to be regulatory and cultural barriers too.
In the UK, regulators and policymakers continue to promote the stock and bond markets, despite the volatility and speculation that arguably make them unsuitable places for ordinary people. If regulators and policy makers in the UK remain wary of opening up ‘unlisted’ financial products to individual investors, such as those offered by crowdfunding platforms, how will they be viewed by regulators in developing countries?
Certain types of crowdfunding products may prove to be more easily accepted by developing country regulators than others. In the UK, for example, in contrast to other more alternative crowdfunding or peer-to-peer products, the established and well understood nature of renewable energy debentures, alongside the low-risk character of the St Briavels model, helped to get Abundance regulated by the Financial Conduct Authority
Will such products be attractive to potential investors in Africa? Many Kenyans’ brief love affair with the stock markets in the heady days of 2007 ended abruptly with the crash of 2008. Could direct investment in local infrastructure, through unlisted securities that are not subject to speculation and sudden declines, hold a certain appeal to such Kenyans, ready to invest again, but with potentially less risk?
If so, then the 590 million Africans without access to electricity could benefit from a new source of finance to boost energy access for all.
Sam Friggens is the in-house writer and energy policy specialist at Abundance, UK’s first regulated community investment platform for renewable energy (www.abundancegeneration.com). You can follow him on Twitter@Sam_Friggens.
This article first appeared in IIED.