A Crowdfunding Agency Model for Renewables in an
Emerging Economy
Un
modelo basado en agencia para financiamiento crowdfunding de energías
renovables en una economía emergente
Cecilia Castro-Cárdenas[1], Alejandro
Ibarra-Yunez[2]
Abstract
Mobilizing
finance for investment in renewable energy is a challenge for climate change
mitigation via fostering the layout of new projects. The challenge becomes critical
in emerging or developing economies, mainly because the architecture of
financial intermediaries as well as their instruments are shallow and
insufficiently developed. The present investigation reviews alternative vehicles
of finance applied specifically to renewable energies, that are intermittent,
so-called non-dispatchable, and innovation- plus capital-intensive, as compared
to conventional sources. The high degree of investment irreversibility and with
relatively high uncertainty in the regulatory and wholesale market, calls to
carefully design origins of finance at the government, private, and mixed
levels. An agency-based theoretical framework is proposed within our ongoing
research effort that includes green banks, state banks, bonds, and mainly, crowdfunding,
that could be applied to Mexico.
Key Words:
Investment & Capacity; Renewable Energy; Crowdfunding.
Resumen
La movilización de financiamiento para la
inversión en energías renovables es un desafío para la mitigación del cambio
climático a través del desarrollo de nuevos proyectos. El desafío se vuelve
crítico en las economías emergentes o en desarrollo, principalmente por la
arquitectura de los intermediarios financieros, así como sus instrumentos, los
cuáles son superficiales e insuficientemente desarrollados. La presente
investigación analiza vehículos alternativos de financiamiento aplicados
específicamente a energías renovables, que son intermitentes, llamadas no
despachables, e intensivas en innovación y capital, en comparación con las
fuentes convencionales. El alto grado de irreversibilidad de las inversiones y
con una incertidumbre relativamente alta en el mercado regulado y mayorista,
llama a diseñar cuidadosamente los orígenes del financiamiento a nivel
gubernamental, privado y mixto. Dentro de nuestro esfuerzo de investigación en
curso, se propone un marco teórico basado en la teoría de agencia que incluye
bancos verdes, bancos estatales, bonos y, principalmente, crowdfunding, que
podría aplicarse a México.
Palabras
Clave: Inversión y capacidad; Energías renovables; Crowdfunding.
JEL Classification: D25; Q42; G23
Introduction and justification
There
is a seminal question of financing renewable energy projects in the case of
developed versus developing economies, mainly because in the latter, financial
institutions and instruments are argued to be shallower and projects face
relatively higher regulatory and market risks than on the former developed
countries. The question has consequences in the welfare front and the quest to
solve the asymmetry of economic bases, financial instruments, and financing
strategies. Critical points need to be spelled out to create a framework not
only on the institutions of energy markets and their risks, but also focused on
financial strategies and instruments to both promote investment in renewable
generation (wind, solar, clean co-generation, mini-hydro, tidal, etc.), while
securing financial soundness in financing strategies and instruments. The
present investigation specifically addresses types of financing to optimize
financing returns from financial strategies, while promoting such investments,
applied specifically to two renewable technologies: solar-pv,
and wind.
The
paper is organized as follows: After framing the critical literature on both
renewables markets and their dynamics in the literature, plus main addressing
of financial conditions for renewable project financing in the next section,
section 3 frames the problem handoff financing small renewable projects, mainly
in developing markets. Section 4 spells out an agency-based theoretical model
between project development and alternative financing and presents theoretical
propositions. Section 5 explores some empirics of the on-going research, while
Section 6 concludes.
Literature review
The Electricity and Renewables
Markets and their Dynamics
After many years of a vertically integrated incumbent
utility, many countries embarked in vertically separating competitive areas of
electricity generation, self-supply, commercialization and trading, and the
development of an independent system operator (ISO) to promote development of
renewable energies, mainly since the beginning of the 21st century (Bieleki 2004; Hogan, IRENA 2018; Rosellón, and Vogelsang
2010; IEA 2018; Rosellón, Myslikova,
and Zenon 2011; Wolak, 2005). Vertical separation began in developed economies
in the eighties (i.e. the UK), but soon after, it was also applied to a bundle
of developing countries (i.e. Chile, Argentina, and Mexico in Latin America).
The beginning of deregulated markets gave a key role
to the regulator to apply asymmetric rules for the monopolistic part of the
(wholesale) markets, while it promoted a wholesale market with many
participants in an increasing atomized environment and increasing number of
renewable producers, consumers, and traders. Such focus has been addressed by
many (EIA 2011; Griffin and Puller 2005; Ibarra-Yunez 2017; Maurer and Barroso
2011 on auctions as an effective vehicle to promote new investments; OFGEM 2010
on the UK deregulation; Pollitt 2012, on challenges in asymmetric deregulation;
Stoft 2006 on vertical disintegration models).
The dynamics and strategic space for renewable sources
of energy and the role of non-conventional generation has increasingly been
studied. However, given technology and market development, hurdles for the
renewable, intermittent, hence non-dispatchable generation has also been
stressed by recent studies such as Bunn and Muñoz (2015); Bushnell, and Novan
(2018); Egerer, and Schill (2014) on the conditioning of generation by transmission
and interconnection market failure; Egerer, Rosellón, and Schill (2015), on
regulatory incentives for renewables, but also IEA (2018), and, more recently, IRENA
(2020),
Moreover, on regulatory and market failure models,
authors that have addressed welfare deviation phenomena include Bushnell,
Mansur, and Saravia (2008), on the dynamics of new market arrangements; Höfner and Cranz (2011) on legal
unbundling imperfections; Jamasb and Pollitt (2005), on applications to Europe;
Joskow (2005) for an application to the California market
failure of 2003; Joskow (2008) on the future of
liberalization; Kwoka (2008) on the US restructuring; Matsuyama (1990) on
imperfect and conditional investment; and Pollitt (2012) on the soundness of an
independent system operator (ISO/ RTO).
Recent scientific contributions have increasingly used
agency-based approaches to emphasize asymmetric objectives and incentives of
renewable projects between investment owners and promoters, as opposed to
funding incentives and institutions. Examples are Van der Berg, & Tempels (2022) for a case study in the Netherlands; and
Martinez-Climent (2021) for a model in Spain.
The promotion and dynamics of clean energy and
non-conventional renewable energy projects by technology, and the means to
promote their uptake has been addressed by fewer authors. However, the subject
has been framed and studied by seminal works from Bunn and Muñoz (2015) on
intermittency as a source of financial risk on renewable projects; Mexico’s
CENACE (2015) on renewables planning and launching; Europe’s THINK project
(2013) applied to the uptake of renewables. Poltzin et al. (2015) studied a data panel of
investments on renewables and their policy influences by technological maturity;
while Ibarra-Yunez, et al. (2017), concentrated
on the legal framework for solar-PV projects in California and Mexico. The
present research and contribution aim to close the agent-based approach to
projects in alternative financing. For that purpose, a further brief review of
the finance literature follows.
The financial strategy, institutional development, and
instruments of financing non-conventional project development.
Fewer research has
addressed the paucity of analyses for asymmetric settings between developed and
developing economies (Liming,2009; Kutan, Paramati, Ummalla, and Zakari,
2017) mainly because the strength and maturity of financial institutions (banks
and non-banks), and their instruments of financing small scale renewable
projects, characterized by their intermittent character, are starkly different
in that they need to internalize relatively higher financial, economic, and
policy risks to these projects. In them policy plays a key role as a complement
origin of both finance (subsidies policies, feed-in
tariffs in Europe, tax policy applied to promote renewables uptake in
investment projects, venture capital as financial options), and deregulation
and asymmetric regulation by project layers or echelons.
Very recently, Mazzucato and Semieniuk (2018)
studied several types of financial actors (including private banks, public
banks, private utilities, and public utilities) and created a risk measure
based on technology and market risk exposure to the financial actors, given
their investment portfolio across technologies and countries. Some other
authors have analyzed the relationship between policy and renewal energy
deployment in several different ways, some of which develop game-theoretical
mathematical models. Main contributions include Delmas and Montes-Sancho, 2011;
Harmelink, Voogt and Cremer, 2006; Jacobsson, Bergek, Finon, Lauber, Mitchell,
Toke and Verbruggen, 2009; Menz and Vachon, 2006.
However, only a
few quantitative analyses address the influence of public policies on
investments in clean energy by private institutional investors (Bolkesjø, Eltvig and Nygaard,
2014; Chassot, Hampl and Wüstenhagen, 2014; Lüthi and Prässler, 2011; Lüthi and Wüstenhagen, 2012). Other alternative mechanisms such as
government feed-in tariffs have been recently studied about their effectiveness
and efficiency, mainly at the load part of the market, i.e., the demand part
(Carley, 2009; Lesser and Su, 2008; Mathews, Kidney,
Mallon and Hughes, 2010).
In contrast, others
concentrate on subsidies as a support instrument that provide fiscal relief for
renewal energy projects, mainly in the early stages of the technology
development (Olmos, Ruester and Liong,
2012; Bergek, Mignon and Sundberg, 2013). Finally,
new alternative mechanisms of private investment or alternatives mixed with
public support, such as crowdfunding, social funds, green banks, and green
bonds, have been used to help policy makers and renewal energy drivers,
investors and project owners. Main referent papers are Yildiz (2014) who
studied financial citizen participation in Germany; Lam et al. (2016)
analyzed precisely the crowdfunding alternative for clean energy innovations
and projects; Mathews and Kidney (2012) reviewed private sector involvement through
the green bonds market, while Whitney (2014) provides a theoretical model for
green banks’ participation on clean energy deployment.
Institutional
framework and mapping
An important
characteristic of renewable energy deployment is that the entire process of a
project implementation is affected by barriers, relating both to the inherent
characteristics of innovation and technological change, and to environmental
externalities (Jaffe, Newell and Stavins, 2005). One of the most important
barriers for clean energy implementation is the financing environment, as is
emphasized here. Polzin (2017) describes a framework of such factors affecting
funding behavior.
Figure 1
Source: Polzin,
F. (2017). Mobilizing private finance for low-carbon innovation. A systematic
review of barriers and solutions. Renewable and Sustainable Energy Reviews: 77,
525–535. At https://doi.org/10.1016/j.rser.2017.04.007
As is shown above, Polzin describes
different steps in the process of clean energy innovation and implementation,
at the government policy element, contrasting project stages. Each stage implies
specific barriers and risks (including the government policy of the country). In
the presence of such environment behavior, different private investment
mechanisms play important roles. During the first two steps (R & D),
technologies are developed by public research institutes or universities as
well as private firms. In the next two steps, the most difficult ones even
called the “valley of death” (Polzin, 2017), capital expenses are high as well
as the risks of failure in the so-called pre-commercial stage of development.
Thus, private financing agents (rather principals in game theory terms), such
as business angels, family offices, crowd-funders and venture capitalists are
the financial providers who accept the risk involved, as opposed to other financial
institutions such as banks who restrain themselves from such project financing,
while green bonds are recent and need underwriting in official institutional
markets, that are often weak or non-existing.
In the last two steps where the technology starts to have commercial
acceptance, funds can be collected from public resources, private equity or
even from banks and formal financial institutions. Financing plays a key role
for renewable energy innovation, implementation and promotion. The first steps
of a clean energy project imply large amounts of capital investments with high
risks involved.
Also, one could
address the framework of financial instruments and set difficulties and
challenges for the diverse sources of financing, following a World Bank (2013) framework,
as follows:
gree of EndogFigure
2
Source:
World Bank (2013), “Financing Renewable Energy - Options for Developing
Financing Instruments Using Public Funds. [Online] Available at: https://www.climateinvestmentfunds.org/cif/sites/climateinvestmentfunds.org/files/SREP_financing_instruments_sk_clean2_FINAL_FOR_PRINTING.pdf
As can be seen,
instruments to finance renewable energy projects by main technologies, depend
on the degree of development of a country in question (developed versus
developing), as well as the degree of development of the renewable technology
in the projects, where the start-up cost is rather high, and the average levelized
cost of energy (LCOE) of the alternative projects, imply financing barriers per se or challenges in both the
financial soundness and the renewable technology and country development stage.
For example, insufficient development of
financial instruments in the left column, such as venture capital, senior debt
credit lines, or asset-backed securities, and green bank project financing,
give rise to shallow financial backing of renewable projects. On the side of
project risks, grants could be available in developed countries but much less
so in developing economies. Also, project risk guarantees, project uptake
insurance might not exist in some cases. All in all, the need to move behind
these mentioned challenges calls for designing project finance that minimizes
financial risks. Examples are stage financing, small scale financing,
aggregated financing of a set of projects in a pool of renewable projects
traded in the wholesale market, in what is called commercial virtual power plants CVPP, contingent project
development grants where financing is provided in stages by the renewable
energy projects, like a seminal contribution by Wang and Zhou (2004), or the
emerging opportunities of crowdfunding as in Lam and Law (2016). Such stage
financing and crowdfunding are emphasized in the present research.
Theoretical
model and equilibrium
Theoretical
Model
Framing a
renewable energy project owner (REP) implies to invest in a solar (or wind) farm
that is capital intensive. Assume also a project financier, for example a crowdfunder providing green investment (CF); both players
are risk averse. Then, assume an electrical utility for both backup and
procuring green energy products for the REP that is assumed to be risk neutral
and passive in the present framework (alternative scenarios of incumbent
playing a blockading role could also be modeled elsewhere in the research
effort, as a third player). Let a game theoretical approach be followed as the
preferred model, because of asymmetric objectives between the players, time
asymmetries, and the risk inclusion.
The game between the
REP and the CF should have a time asymmetry character since one cannot assume
immediate funding to integrate risk bearing in a finite-conditional funding in
stages. The game frame can be seen as follows: at time
Source: own generation
Time space of the
REP is determined by
Following Zheng Ying-Xu,
Chakraborty and Sycara (2015), the utility provides
energy to consumers with demand
Now the active REP
supply
Let’s assume that
the uncertain green output
The REP´s
decision program is to maximize funding/output in the market:
On its part, the CF payoff to maximize follows from
the above as:
Where
REP risk aversion utility
Equilibrium
Given all the
setting described above, consider the options: a) no crowdfunding; b) full
crowdfunding with a risk assumption; c) crowdfunding stage funding with risk
assumption in stages.
No crowdfunding
In the base case,
the utility determines wholesale prices
REP:
For the utility,
it chooses the wholesale price that minimizes the expected procurement cost.
So, the optimal
Crowdfunding in one shot form
Additional to the
REP self-funding
For the CF, each
investor payoff under investment decision (
Stage/conditional funding
Then the CF sends
all part of the risk factor of the maximization towards the REP, that needs to forecast
each stage 1,2,3 net revenues from investing
With the above alternatives, one could further the
following hypotheses:
Hypothesis 1.- In the case of no crowdfunding, the REP will face the
wholesale price set by the utility wt
and will be increasing in energy generated (scale of the REP), and the funding
the utility is willing to pay, given its own cost minimization E [c0
(w)]. The cutoff equilibrium will be w*
Hypothesis 2.- In the case of funding on one shot, the utility will
face a wholesale price requirement w** < w* to cover its relationship
with the REP, meaning that the CF becomes the active participant principal of
the REP agent. For the REP, it will invest in the renewable project N*0
(w) depending now on the amount of funds from the CF, and investment costs.
Hypothesis 3.- In the case of full financing, the CF principal will
offer the funds in period 2 that integrate the net expected revenue from the
REP agent, with the project risk subtracted from net REP revenues. The assumed
risk for the REP will be declining in investment effort and investment costs.
Hypothesis 4.- In the case of stage financing, REP investment will
increase in conditional stages by the CF principal. Stage funds are increasing
as REP risk is decreasing in the stages. For the CF, the reduced risk from the
investment project Bt
Empirical framework for a workable
case
Since around 2010, renewable energy efforts have
increased mainly due to the abatement of the weighted average cost of capital
(WACC), additional to REP and CF project risk. According to IRENA (2018), one
weight that is acceptable is a 7.5% for OECD countries while the WACC could
easily reach around 10% for the rest of the world, without considering exchange
rate volatility.
Now, taking IRENA’s global calculation of the various
emerging renewable technologies and their average costs, they range for 2017,
from around US$2,000 for large PV-solar, to US$3,700 for small (below .5 MW)
per kW. For wind projects, average levelized cost ranges from US$1,200 to
US$1,700 per kW. For combined cycle investment (CC-gas projects), it is around
US$1,000 per kW, while for hydropower ranges from US$1,000 to US$3,500 per kW.
As can be seen, renewables have become rather competitive in installation
costs, and cannot be seen as too expensive. Moreover, energy efficiency indexes
have increased to around 20% - even 40% which avoids one main criticism to
renewable projects.
Given the above cost of capital and installations, or
CAPEX, the OPEX in 2017, according to the firm Lazard (2017), before subsidies
and tax credits, wind comes as the cheapest with operating costs of between
US$30-60 per MWh, then comes large solar-PV OPEX at around US$43-53 /MWh, while
combined cycle, or CC costs range from US$42 to US$78 / MWh, while coal is at
least at the level of US$ 60 /MWh (Lazard 2017). Figures for latest 2021 are
not readily available due to economic disruptions arising from the world
COVID-19 pandemic. However, one can check the abatement of costs in renewables
for 2021 to be around 35%. Most small REP projects range from around USD$
70,000 to about USD$ 500,000 overall in 2015 (Zheng et a. 2015).
Main risks of renewables, as has been stressed in the
present research have to do first with the intermittency of REP that increase
financial risks; the size of RE projects, that could stay small and not
attaining minimum efficient scale to be partially funded, mainly by non-banks.
The most important sources of risk for REP to enter the market seem to arise
from incumbent utilities with high market power that could discriminate against
or even negate interconnection against renewable projects, mainly if the wholesale
market participant is weak. Then another source is the wholesale price w, w*
and w**. Hence, small project funding ones, as crowdfunding and other
competing sources (ex. green bonds), can be justified.
Additionally, another source of risk comes from
regulatory failure, meaning that the regulator fails to provide predictable and
clear regulatory instruments to promote the expansion of markets and investments
(Ibarra-Yunez 2017). The above has been evidenced more starkly by Mexico’s
central government decisions that have derailed renewable economic incentives
(not modeled in the present analysis but could change in future
administrations).
One needs to note that from the pure cost comparisons
there seems that REP is not at a disadvantage, except that the upfront CAPEX
poses a time asymmetry for the project risks (CAPEX is somewhat higher in REP
than fossil sources, but with much lower OPEX than traditional fossil sources).
According to IRENA (2019), the global weighted average cost of electricity from
onshore wind, fell 23% between 2010 and 2017 to around US$40 /MWh, mainly
driven by turbine cost declines.
Recent auctions have occurred in many countries such
as Canada, Germany, the US, and Poland among developed economies, and in
Brazil, Chile, Mexico (until 2019), Morocco, and Saudi-Arabia, among developing
ones. Auctions seem to become a well-regarded means to promote REP uptake,
mainly for the following reasons: a) they attract investors; b) leveling the
competitive field if regulation is transparent and purposeful; c) triggering
asymmetric pro-market regulation in those market parts that are not natural
monopolies; and d) auctions have lowered the offered costs.
A case can be built with experiences between developed
and developing examples and hurdles. Noteworthy is that onshore wind power
LCOEs were as low as US$0.03/ kWh, with average capacity factors reaching the
mentioned 30% by 2018, both in developed but mostly in developing economies
(IRENA 2018). With the above framework, one can simulate REP as an ongoing
research exercise in a future research effort.
To conclude the present section, the next figures
exemplify the cost reduction of renewable energy by technology, the global
average size of capacity and energy installations, capital costs, and renewable
uptake comparisons.
Source: IRENA. 2020. Data file renewable power
generation costs.
Source: IRENA. 2020. Data file renewable power
generation costs.
Conclusions
The present article analyzes the main financing
vehicles funding renewable energy projects, mainly considering the risks
involved, the specific and intensive capital needs and the institutional
barriers. Emerging economies also provide different ecosystems that increase
the risks perceived and impact investor’s perspectives, as sources of finance
and renewable projects face differences with developed economies.
A game theoretical model is presented capturing the
financing process between a private capital investor (Crowdfunding CF), an
electricity utility, and the renewable energy project owner (REP) from a group
of funding options: no funding, full funding or stage (conditional) financing.
Equilibria and outflows are modeled per scenario and analyzed considering all
the players.
Finally, an analysis of a future workable case is
provided in order to identify the future applications and research paths to be
followed to increase the existing literature in the matter of innovate
financing mechanisms for clean energy deployment in emerging economies. No
sufficient data can be found, but a research set of hypotheses grants the
treatment of the research effort. Limitations to be addressed in future
research, that are not addressed here, are a) risk behaves in a static manner
with a normal probability distribution that can be freed, and financing volatility
modeled with other distributions; b) the REP in the present paper is not
restricted to seek funding under less than minimum efficient scale. Integrating
small projects and large projects (such as ones below 1MW capacity and above
1MW capacity), established by many (Mexico’s) regulations to make projects
obliged to sell in the wholesale market; c) for lack of readily available data
sources, the present research presents in the last section, a brief description
of cost reductions by technology, average global investment costs of
installations and power flow costs (in US$/MWh), as an indicative insertion to
data sources. A further study could use some aggregate but also micro-level
data for a quantitative analysis of the subject under study.
All in all, however, the present research project
contributes to the project financing literature and understanding of renewable
project uptakes and their main hurdles in today’s world.
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[1] Doctoral Candidate,
Fourth Year, Ph.D. program in administrative sciences, EGADE Business School,
Tecnológico de Monterrey, Ave. E. Garza Lagüera y Rufino Tamayo, s/n. Col.
Valle Oriente, Garza García, NL 66269, corresponding autor, email: cecicascar@gmail.com
[2] Professor emeritus in
Economics and public policy, EGADE Business School, Tecnológico de Monterrey,
Ave. E. Garza Lagüera y Rufino Tamayo, s/n. Col. Valle Oriente, Garza García,
NL 66269, email: aibarra@tec.mx ORCID