Blockchain-based crowdfinancing mechanisms for renewable energy projects

Abstract

Recently, there is a growing need to address the investment gap in renewable energy by attracting non-institutional investors that have investment preferences better suited for the energy transition. Crowdfinancing is a promising alternative, as it allows for increased innovation, more sustainable development and reduced community risks and is driven by a crowd of small investors that are less profit-driven than professional investors. However, current crowdfinancing models are limited by lack of trust, adverse selection, exclusive corporate governance and lack of liquidity. While extant research has identified these limitations and the potential of blockchain technology to solve some of them, there is a need to design the blockchain-based crowdfinancing mechanisms required and provide a business case for their implementation. The research objective of this practice-oriented design research is to provide a practical plan for the implementation of blockchain-based crowdfinancing for renewable energy projects by means of a design and business case for engineering and consultancy firms as the facilitators of the process in the Netherlands, with the purpose to give a boost to the energy transition.
A foundation for the research was provided by making an analysis of the evolution and current state of the Dutch energy market organization based on three cornerstones: market roles, production and financing. This analysis showed a high degree of decentralization in terms of market roles and production from renewables that allowed the emergence of community driven energy cooperatives, while a dependence on centralized financial intermediaries is still present; risky and small projects do not have access to bank financing and existing crowdfinancing platforms charge high brokerage fees and provide no secondary markets. A pilot study based on the same cornerstones and consisting of interviews with relevant market parties was performed in order to supplement the analysis of the market for the formulation of design requirements for the crowdfinancing mechanisms. Qualitative desk research was done on existing smart contract applications that could be utilized to overcome the limitations of crowdfinancing and served as the building blocks for the conceptual designs. Qualitative desk research was also performed in order to quantify the costs and address the (legal) implications of implementing the mechanisms proposed.
The result was a practical plan consisting of blockchain-based crowdfinancing mechanisms that reduce brokerage fees and facilitate the organic establishment of secondary markets by making use of existing public blockchain infrastructure, and a positive business case for consultancy and 10 engineering firms to facilitate the process. Smart contracts govern the crowdfinancing process autonomously for low and high risk projects, where with the latter crowdinvestors are given financial control by locking project funds in trustless escrow contracts, thereby allowing them to cut losses in failing projects and thus addressing the issues of lack of trust and exclusive corporate governance, while mitigating the effects of adverse selection. This practical plan provides a tool to further empower the crowd as the fuel for the energy transition, thereby increasing investments in renewables. However, social exclusion might result at first from the intrinsic complexity of blockchain technology and the degree to which a boost can be given to the transition remains unclear due to a lack of consensus on the effectiveness of crowdfinancing to increase support for the bigger projects. There is further research needed into a risk management-based approach for the design of escrow contracts that release funds according to a project planning, while the delegation of control rights to more capable third parties also requires more research. Additionally, the application of decentralized governance beyond financial control requires further examination as well.