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How crowdfunding is supporting Collective Action Initiatives and energy transition

by Oliver Gajda on 01.05.2021

EUROCROWD is working on several initiatives aimed at supporting energy communities and energy poverty such as COMETS and POWERPOOR. Crowdfunding can in fact be a powerful tool to finance local energy community projects that would not be financed otherwise. So, how can crowdfunding support Collective Energy Actions in the Energy Transition? We can draw some initial conclusions from our ongoing work.

EUROCROWD aims to reinforce and provide expertise through our experts in all matters related to crowdfunding within, amongst others, energy communities as part of our work within COMETS. Crowdfunding is a financing tool that can be exploited very efficiently to finance Energy Communities, but the lack of knowledge of these alternatives for financing projects means that its full potential is not being realised.

The path to a carbon neutral energy transition goes along with large knowledge gaps around the governance of energy. So called Collective Action Initiatives (CAIs), aim to mobilize people through participative approaches, to ensure that citizens are at the centre of the required fundamental transformation and actively participate in the necessary transition process. CAIs play a fundamental role in the energy transition, as they enable changing the traditional structure of energy generation, which is fundamental to achieve both the economic and environmental sustainability of our system.

Energy communities are associations of people who join forces to generate their own energy, such communities are a vital part of CAIs. According Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market for electricity and amending Directive 2012/27/EU (Text with EEA relevance) they are "a legal entity which is based on voluntary and open participation, and whose effective control is exercised by partners or members who are individuals, local authorities, including municipalities, or small enterprises; whose main objective is to provide environmental, economic or social benefits to its members or partners or to the locality in which it operates..."

Today, the energy market is highly centralized in most European countries, with significant energy oligopolies. Energy communities can address this problem by mobilising individuals to generate their own energy within their local energy community. For example, energy production far away from the place of consumption leads to a great loss of efficiency. By decentralising part of the energy production to a location closer to where consumption takes pace, energy communities may help overcome key weaknesses in the currently centralised energy market. Decentralization of energy production could also help overcome the depopulation of rural areas, as it can attract investment and generate employment opportunities.

Energy communities are also interesting for those citizens living in rented accommodation or in urban areas without sufficient space for renewable energy installations. They can choose to consume 100% renewable energy produced locally by energy communities. Energy created through partnerships with other local citizens or stakeholers with access to relevant space can lead to a reduction of individual costs - with limited individual investment larger benefits can be obtained for the community.

Crowdfunding is an interesting instrument to finance this type of initiatives. Thanks to its unique ability to mobilize citizens and leverage private capital from citizens it is particularly well suited to tackle the challenges of decentralising the energy supply. It can help bridge the gap between the strategic and technical level of the energy transition and its implementation within local communities.  For example, individual local energy community projects can collect funds in a very simple way through a crowdfunding platform. Crowdfunding also allows to attract support from individuals who have no direct involvement in the project, but who support the project either for monetary, personal or social motivations. Crowdfunding can help democratise finance and allows also people with limited resources to pro-actively engage in the energy transition. Depending on the crowdfunding model and platforms, contributions already start with a few euros.

The following figure illustrates the different types of crowdfunding:

Depending on the characteristics and size of the energy community project, different crowdfunding models can be chosen, in order to reach the target audience in the most effective way. Crowdfunding is a growing market with European harmonisation for financial instruments being rolled out between 2021 and 2022 under the European Crowdfunding Service Provider Regulation (ECSPR). It is able to engage on all aspects of the energy transition: from supporting the ongoing effort to increase Renewable Energy Sources (RES), via providing assistance in the reduction of energy consumption through Energy Efficiency (EE), the facilitation and promotion of energy access (energy poverty) to helping to democratise energy investments.

Interesting synergies can be achieved by combining public and private interests. For example, local authorities can leverage public funds by involving the citizens or co-finance civic projects. These co-financing schemes of public and private entities using crowdfunding mechanisms are denoted as "match-funding", as described in European Investment Bank (2020): Crowdfunding and ESF opportunities: future perspectives for managing authorities. A fi-compass manual. There are different forms of match-funding mechanisms, e.g. the public entity provides a fund to complement the amount raised from the citizens themselves through the crowdfunding campaign or invites the citizens to leverage the funding for a certain project. The principal aim is a combination of mixed funding, bringing together the interests and needs of citizens with the strategic objectives of the institutions. In this way, authorities can encourage the development of energy communities in their municipalities. This can help to generate sustainable employment, fight climate change and also help to prevent energy poverty that may be suffered by their citizens.

One of the main benefits of crowdfunding for energy communities is that it leaves a high level of autonomy to the investor. Crowdfunding facilitates citizen participation, which can materialize through energy communities. Such citizen engagement is crucial to accelerate climate transition. In the end, the accumulation of decisions of single individuals, creates an impact on the importance and recognition of sustainable energy communities leading to significant positive changes to society, both in terms of policies and businesses.