European Geologist Journal 54

Community Funding for Geothermal Energy 

 

by Georgie Friederichs¹, Ronald Kleverlaan¹, Christina Baisch² , Isabel Fernandez³

1 CrowdfundingHub, Amsterdam, The Netherlands

2 Vulcan Energy Subsurface Solutions GmbH, An der RaumFabrik 33c, 76227 Karlsruhe, Germany

3 European Federation of Geologists, Brussels, Belgium

Contact: georgie@crowdfundinghub.eu

Abstract

Community funding is a tool to involve communities in geothermal projects in such a way that they can be involved in the decision making around the project and/or receive some of the benefits. There are different alternative finance instruments that give different options to involve investors from the community surrounding the project, thus realising community involvement, commitment, and funding for the project. These can be combined with risk mitigation instruments to limit the risk that community investors are exposed to. The characteristics of an individual project and the risk appetite and risk-absorbing capacity of community investors determine which combination of instruments is best suited. Because the outreach to, and involvement of, the community is very important for the acceptance, use and community support of geothermal projects, involving the community on the finance side of a project can be useful to make the successes and results of the project more accessible to the community.

This work is licensed under a Creative Commons Attribution 4.0 International License.

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1. Introduction

One of the main objectives of the CROWDTHERMAL project is to empower the European public to directly participate in the development of geothermal projects with the help of alternative financing schemes. This article will present a summary of the financial schemes recommended for geothermal projects, taking in consideration the type of geothermal project, type of capital, financial risk and capital required for each project phase.

Community funding is the umbrella for alternative finance methods that are used to facilitate investment by the community directly into projects or companies. It is a way to financially involve the different stakeholders around a geothermal project. Community funding can bring a number of advantages to a geothermal project both by improving social involvement of the community and by contributing to the financial side of the project. Through community finance, members of the community choose which project or project category they want to invest in, and their repayment and return are (usually) connected to the success of the specific project or project category. The process of community funding can be realised via a platform, like a crowdfunding platform or a direct lending platform, or directly into bonds or shares issued by a project or company itself.

Community funding in general is focused more on impact and social context than just on financial reward. This makes it a suitable form of (co-)finance for geothermal projects where it is important to involve the community and other stakeholders.

Community funding comes in different shapes and sizes. It uses new finance schemes and old traditional ways. New fintech development can help to realise a community project at lower cost, because it can reduce the cost of the financing process or can realise funding where the bank would not provide loans It can also increase the outreach to all possible members, which makes the community project more effective. Geothermal projects could possibly benefit from using these new financing schemes.

The main advantages for a project developer to be gained by using community funding and these new financing schemes are:

• Outreach to a larger part of the community;
• More transparency for an involved community;
• Customer friendly process through use of digital models;
• Easy maintenance of the community funding project;
• Easier to comply with regulation thanks to a digital approach;
• Easier communication with the community group and individuals;
• Lower costs for the community funding project.

There are also advantages for the community members when community finance is used. This means these members can:

• Be more directly involved in the decision making around the project;
• Be actively involved in the realization of the project and its sustainability goals;
• Be better informed about the project;
• Receive some of the financial or other benefits (cleaner or cheaper energy) of the project.

Community finance is realised most easily by using alternative finance instruments. Alternative finance methods can be defined as  any type of financial service managed outside the traditional regulated banking and capital market sectors. These services are driven by fintech and are part of a swiftly growing network of service providers that are linked to the digital ecosystem.  [1]

2. Methodology

A number of best practices of using alternative finance in the sustainable energy field were studied to determine which types of alternative finance can be used to realise community funding in geothermal projects. Based on the lessons learned from these cases and the different phases of geothermal projects, a classification of financial risk of the different alternative finance instruments for community investors and a project developer was developed. Next, possible combinations with risk mitigation instruments were formed. Based on this information general guidelines for alternative finance in the different phases of a geothermal project have been developed. 

Lessons learned from best practices were also used as a method to analyse community finance [2]. Important lessons learned were, e.g.: the need to focus on the impact of the project (sustainable energy) and not on the financial return, as this will increase the commitment of the community, or the advice to build a community first, as this can make the financing more successful. It is advised to start with a small, involved community and if that is successful, increase the target group for investment. The analysis of best practices revealed that there are several forms of community finance that can be promising for a geothermal project.

3. Alternative Finance and risk mitigation instruments

There are different alternative finance instruments that can be used to realise community funding. Examples are crowdfunding, direct lending, or social or green bonds. When choosing a certain finance instrument, it is important to look at the effects the use of a specific instrument has for the project developer and community investors. Some financial instruments are riskier for investors but also offer a higher possible return on investment. Other instruments may mean a stable return on investment and thereby less risk for investors but then often mean more risk for the project developer.

Alternative finance instruments can be combined with risk mitigation instruments to obtain the right mix of risk and return for all parties involved: the project owner, the involved community and other stakeholders, like local governments or other investors. The right mix of instruments to use depends on the risk appetite of the community and the project owner in a specific project and on the project phase in which the community funding will be used. It is important to realise that the specific circumstances of an individual project determine which combination of instruments fits best. It is not a one-size-fits-all situation.

A list of alternative finance instruments that can be used for community finance in geothermal projects is presented below. These instruments or ways to realise funding can use the mechanisms of crowdfunding or others. Crowdfunding can be defined as the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the internet [3]. Alternatives to crowdfunding can be raising the money from a smaller group of individuals or a company, or from a government using these instruments.

Possible alternative financial instruments for geothermal projects are:

Donations

Where people donate money to a project with no return expected. Donations can be carried out with crowdfunding.

Reward-based funding

With reward-based funding the investors choose to invest in an individual project or company. The reward they receive is a non- monetary one. They can receive certain products, be invited to certain events or receive products at a discount. Reward-based funding can be carried out with crowdfunding.

Social impact bonds/Green Bonds

Social impact bonds and green bonds are debt instruments specifically designed to realise certain non-financial objectives. They look like a regular bond but are very different. A social impact bond is a “pay for success” financing instrument for projects that will create better social outcomes, where the payment to investors is flexible, based on the achieved results or savings. A green bond is a bond that is specifically earmarked to raise money for climate and environmental projects. It can be realised in the form of a social impact bond. Social impact bonds can be carried out crowdfunding.

Equity investments

With equity investments the investors also choose the project or company and invest, as with reward or output based funding, but as a reward they receive shares in the project or company. They will receive part of a project, but also share in the loss if a loss is incurred by the project. Equity investments can be done with crowdfunding.

Revenue-based funding

In revenue-based funding the investors only receive a reward based on the revenue realised. This reward can be financial or non-financial. Revenue based funding can be done through crowdfunding.

Output-based funding

In output-based funding the investors only receive a reward based on the quantity of output realised. This reward can be financial or non-financial. This can be done through crowdfunding.

Direct lending

Direct lending is a form of lending where a financial intermediary gives out bonds or other debt (fixed income) instruments to investors and uses the incoming funds to finance projects or companies, without going through a bank;

Leasing

Leasing is a process by which a firm can obtain the use of certain fixed assets for which it must pay a series of contractual, periodic, tax-deductible payments. It is a contract between the funder (lessor) and the end-user (lessee) for the acquisition and use of an asset and/or solution and (if included) any associated costs, such as maintenance in return for payment over an agreed period.

Match funding through grants or donations

Match funding is when a governmental organisation adds funding to funding generated by other investors in order to finance a project or company. The funding by other parties is often a requirement to receive match funding.

Retained profits

Retained profits are earnings kept from a project that can be used to finance the next phase of the project.

As mentioned, most of these instruments can be realised through crowdfunding. Crowdfunding means the funds are raised directly from the community. Crowdfunding and community funding overlap but are not the same thing. Crowdfunding usually raises also community funding, although institutional parties or (local) governments, who are not part of the crowd, can also invest. But community funding can also be realised in other ways, for example through social or green bonds and direct lending.

An interesting supporting instrument to increase the involvement of the community and other stakeholders is steward ownership. This is a form of ownership where all stakeholders involved, including employees can be owners of the company together. This means the company is not just driven by share value but more focused on realising the products and overall goal of the company. Steward ownership can be combined with all alternative finance instruments.

Another set of supporting instruments are risk mitigation instruments. Risk mitigation is a strategy to prepare for and lessen the effects of threats faced by a business [4]. In this context we focus on financial risk or threats. These can arise for the business, but also for other stakeholders like the community investors.

As community investors are usually investors with limited funds, it is difficult for them to reduce investment risk for themselves by diversifying their investments over different projects or companies. Geothermal projects can have high risks, especially during the first phases of the project. To protect community investors from this risk, and the possible negative reputation of the project if things go wrong, risk mitigation can be very useful.  Different risk mitigation instruments can be used to establish an appropriate risk-return profile for all parties involved. Some examples are guarantee instruments, fiscal instruments or smart contracts.

To create insight into the different risk consequences for parties involved, Table 1 gives a general indication of the risks involved for different parties when investing in geothermal projects using different alternative finance instruments.

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Table 1: Alternative finance instrument and their risks for community and project developers [5].

Risk ladder	Risk profile	Community risk	Project developer risk
Donations	Risk absorbing	Very High	Very Low
Reward based funding	Risk absorbing	High	Low
Social bonds, green bonds	Risk absorbing	High	Low
Equity investment	Risk sharing	High	Low
Revenue based funding	Risk sharing	Medium-High	Medium-low
Output based funding	Risk sharing	Medium	Medium
Leasing: Operational lease, ownership risk lies with owner/developer, users “rent” the asset	Risk sharing	Medium	High
Leasing: Financial lease, risks lie with user/community	Debt	High	Low
Direct lending Through crowdfunding, direct lending	Debt	Low	High
Match funding Through grants or donations	Debt/risk sharing/risk absorbing	Depends on character	Depends on character of funding
Retained profits	Reserves	Low	Low

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When looking at the adjustment of the risk-return profile by using risk mitigation instruments, not all combinations will be successful [5]. Table 2 gives an overview of which risk mitigation instrument can be of added value to which alternative finance instruments.

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Table 2: Alternative finance instruments and risk mitigation.

Risk mitigation instruments	Can be combined with	Risk reduction capacity
Grant/subsidy	All community finance methods	Medium
Guarantee	Social bonds, green bonds, leasing, loan products	High
Match funding	Loan products, leasing, maybe equity instruments	Medium
Insurance	All community finance methods	High
Governmental lease	Lease by the community/operational user	Medium
Buy-back options (alternative form of operational lease)	Equity, reward based, output based, revenue based	High

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4. Matching alternative finance instruments to a geothermal project

The possible alternative finance instruments and their combination with risk mitigation instruments have now been explained. The next step is to look at if a developer or community wants to use alternative finance instruments and which alternative finance instrument might suit a specific geothermal project.

Guidelines have been developed containing all the relevant steps when considering the involvement of a community in geothermal projects, both through social involvement tools and community funding [6]. When choosing community funding there are a number of follow-up questions to answer to choose the most suitable alternative finance instrument. To assist with the answering of these questions, a conceptual framework has been developed [5].

In this framework the following tasks have to be completed:

1. Define the involvement goals of the project [7]

Why does the project developer want to involve the community, what does he/she want to achieve by involving it?

2. Define and select the relevant community [8]

Which community fits this goal, who are they?

3. Define the community’s (risk) profile

What is the social and financial situation of this community?

4. Define the appropriate risk level for the community, and also for the project developer

What risk can the community absorb, and how does this risk potentially influence the goals?

5. Define the finance and risk mitigation options

Which combinations of financial instruments and risk mitigation instruments fit the goals and community of a specific project (developer)? 

 

We must bear in mind that the characteristics of each individual project are different, which means there is not one always applicable best solution. However, it is possible to give a general indication of which instrument suits which category of projects.

There are four main factors specific to a project that determine the suitability of instruments.

• The first factor is the project phase a project is in when the financing is required.
• The second factor is the type of capital which would suit this project phase. The type of capital can be:
  • risk absorbing (when the capital takes risk away from the project owner or other investors);
  • risk sharing (when the capital shares in the risk with the project owner or other investors);
  • debt (which always has to be repaid thus possibly increasing the risk for the project owner or other investors), or
  • retained profits (which are generated by the project itself).
• The third factor is the financial risk. This is mainly determined by the project phase the project is in, but can also be influenced by other characteristics of a certain project [9].
• The fourth factor is the amount of capital required. Typically, the amount of capital in, for example the definition phase is low, while capital required in the drilling phase is much more. Again, this can vary from project to project.

These factors together can give a general indication which alternative finance methods could be suitable for a certain project, as indicated in Table 3. Using all this information a suitable community finance approach for a geothermal project can be developed (keeping in mind that project-specific circumstances will determine the actual possibilities).

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Table 3: General guidelines for alternative finance instruments for a geothermal project [10].

Project Phase	Type of Capital	Financial Risk	Capital required	Suitable (Alternative) Finance Methods
1. Project Definition	Risk-absorbing, Risk-sharing	High	Low	Subsidies/grants/donations, crowdfunding (E/R), direct lending combined with governmental guarantee, governmental lease
2. Exploration	Risk-absorbing, Risk-sharing	High	Medium	Subsidies/grants/donations, crowdfunding (E/R), direct lending combined with governmental guarantee, governmental lease
3A. Drilling First Well	Risk-absorbing, Risk-sharing	High	High	Subsidies/grants, crowdfunding (E/R), governmental lease, direct lending combined with governmental guarantee, green bond, regular loan, regular bond, equity
3B. Drilling – Resource Development	Debt	High/ Medium	High	Crowdfunding ((E)/L/R), governmental lease, direct lending, green bond, regular loan, regular bond, equity
4. Construction	Debt	Low	High	Crowdfunding (L/R), direct lending, leasing
5. Operation	Debt	Low	Medium	Crowdfunding (L/R), direct lending, leasing
6. Decommissioning & Post-Closure	Reserves, Risk-absorbing (Government)	Medium	Low	Retained profits, governmental funds

Note: E=equity, L=loan, R=reward-based

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5. Conclusions

Alternative finance and especially community funding can successfully be used for different geothermal projects and technology types as well as various investment sizes, and these funding sources can increase the involvement of the community in geothermal projects. Successful community funding needs to match the actual technical and financial characteristics of an individual geothermal project with the community investors’ risk appetite and motivation for involvement. The community finance method most suited for a certain project depends on a number of factors, which means case-by-case evaluation is needed as to which method should be chosen. Each project phase requires a different financial instrument to match the risk profile, the amount of capital needed, and the kind of capital needed.

Acknowledgments: This research was funded by the European Union’s Horizon 2020 research and innovation programme under grant agreement number 857830.

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This article has been published in European Geologist Journal 54 – Geothermal energy – A geological contribution to the energy transition

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