RISKS vs. MITIGATION MEASURES: Crowdfunding (general)

Project Developers’ Perspective

RISKS

• Crowdfunding is relatively costly. As the resource-related risk of not finding a hot aquifer is high, the investors usually expect high return rates.
• The project developer still owns the exploration risk unless a geothermal risk mitigation insurance or fund is in place.
• European secondary legislations limit how much capital can be attracted by crowdfunding in one project by a maximum size limit. New EU regulation will limit crowdfunding to 5 Mio. €.
• The possible maximum size of crowdfunding also depends on the investment analysis of the crowdfunding platform. Once the crowdfunding limit is set, it cannot be increased anymore. This is a restriction for project developers.
• Another large concern for project developers is the risk of not reaching a desired crowdfunding target. This involves the risk of insufficient interest of the public to invest in a geothermal project due to a lack of knowledge, inexperience with crowdfunding or unfamiliarity with geothermal in general. It can also be due to a possible bad image of geothermal investments.
• The legal obligations when using crowdfunding in the order of magnitude of several million Euros are substantial. Securities for investors need to be provided and individual investor’s rights have to be understood and taken care of. Even when using a professional crowdfunding platform, it takes time and thus money to understand the legal framework and legal risks for a project developer.
• Managing a group of hundreds or even more individual crowdfunding investors can also be a challenge.
• Crowdfunding via a platform requires paying a platform fee. Do it yourself crowdfunding also involves a legal fee.
• Another risk is the insufficient security of data and intellectual property of a project or applied technology.
• The insolvency risk of a crowdfunding platform with regard to e.g. the protection of client’s assets also needs to be considered.

MITIGATION MEASURES

• Know the governing laws regarding business model, financing and energy regulations before deciding on the on the most appropriate form of business model, alternative financing method and overall financial mix.
• Use a professional and trusted crowdfunding platform ideally experienced in supporting geothermal projects (e.g. Abundance, Lumo, OnePlanetCrowd) or other renewable energy platforms.
• Try to avoid complexity. The financing model should be as simple as possible.
• Be aware that involving people and making them enthusiastic about a project requires time and energy.
• Start early with professional marketing and public relation activities.
• Communication and information should be publicly available to ensure sufficient participation.
• Clearly and openly communicate the goals, potential benefits, risks and the schedule of the project.
• Do not promise unattainably high revenues, but rather focus on impact investors.
• Start with a small core group for “inside out” community building.
• Engage the community through events, workshops and other social engagement formats.
• Consider allowing contributions at a low level e.g. at only a few Euro and use new IT technologies e.g. PayPal or per text message (SMS).
• A good example for the engagement of the local community is to restrict the (early) participation in community funding to inhabitants of the community or region and to apply different conditions depending on the proximity to the project.
• Utilizing the heat from a geothermal project commonly enhances the local engagement of the public, because the community can directly see and feel the merits of the geothermal energy as opposed to power that is fed into a central grid.
• Keep local governments involved from the beginning and throughout all project phases.
• Discuss municipal green ‘speed’ passes for administrative procedures or tax-saving in municipal taxes.
• A high degree of trust/confidence in the integrity of the project developer and its key personnel / board members is essential. Involve locally well-known individuals, experts of the renewable energy community and/or reputable institutions for trust building and credibility increase.
• In order to prevent illegal activities, crowdfunding projects should install additional technical measures like a good supervisory board with geothermal experts, or a paid expert advisory board.
• Try to apply match funding with a trustworthy platform or public institution to increase both credibility and the amount of funding.
• Check for best practise de-risking measures (GEORISK tool) as well as potential geothermal risk mitigation schemes (GEORISK example) helping to offset the resource-related risk.
• Check for opportunities of governmental guarantees or insurance products within crowdfunding platforms.
• An upfront alternative financing concept needs to be in place in case the crowdfunding cannot provide sufficient capital. It should be planned hand in hand with traditional financing in order to achieve a robust overall financing plan.
• Include a financial go/no go decision point at the point in time when it is clear whether the desired crowdfunding threshold value can be reached or not.
• Careful contingency planning should be applied in the overall financing plan, especially with regard to the drilling costs.
• A possible way to scale up the total amount of crowdfunding for a project developer can be “serialcrowdfunding”.
• One measure to mitigate the risk of not reaching a crowdfunding target is private fund co-investing. In this case, platforms have their own fund that will co-invest in crowdfunding deals.
• In order to avoid the extensive equity or debt regulations present in most countries and to avoid any possible crowdfunding size limits, project developers can also try to work with donations.
• Understanding and developing a project in a holistic way, taking into consideration technical, financial and social dimensions and their interdependency generally reduces the risk of interface problems and increases the chances for a social license to operate.

Community Investors’ Perspective

RISKS

• Poor returns or losses are the biggest risks from a community investor’s perspective.
• The small investors face the possibilities of a lower than expected yield in case of a deviation in the original project plan or even full loss of their investment in case of project failure / dry wells.
• Even though mostly covered by regulations, potential illicit activities of the platforms need to be considered.
• The theft of assets (financial fraud) can also cause a direct loss to crowdfunding investors.
• As crowdfunding is a relatively new form of alternative financing, there are risks relating to market inexperience and untested professional liability of crowdfunding platforms.
• A possible insolvency of the crowdfunding platform could affect the continuous servicing of e.g. interest payments.

MITIGATION MEASURES

• Invest only in what you understand in order to better estimate risks, challenges and opportunities of an investment. Seek publicly available communication and information material to allow informed decision-making.
• Be aware of the high resource-related risks in the early project phases of deep geothermal developments.
• Understand risk/return ratios with regard to the fact that riskier investments will pay higher returns, but also have a larger chance of e.g. bankruptcy of a company or failure of a project. To a certain degree, community investors have to accept these high risks in exchange for a chance of high returns. An investment in low-risk phases like the construction phase, for example, would yield only low returns.
• A basic level of understanding of best practices in geothermal project development / PPA negotiations is an advantage.
• Check the country risk prior to investment (e.g. The World Bank 2020[1]). Even within Europe, there is a large variety ranking from Denmark (4) to Greece (79).
• Be aware that the revenue stream of a deep geothermal project does not start before the end of the project implementation timeline which can last many years.
• Invest with spare money not needed on short term.
• Invest small amounts over a long period in order to spread the risk across positive and negative economic cycles.
• Diversify the investment portfolio into different risk levels and types of assets.
• Spread the investment to reduce the chances of losing all investment in case of default of one project or company.
• Make sure to use a professional platform with a good reputation and high quality standards with regard to their license, affiliation to professional associations, code of conduct, track-record, average default rate, due diligence practise on projects and continuation plan for servicing repayments in case of platform failure. Check the credibility of the crowdfunding platform carefully.
• Ask for investor protection products i.e. a minimum level of insurance.
• Ask for possible governmental guarantees.
• Request a good supervisory board with geothermal experts.