Using Blockchain to Scale Climate Finance
It has been calculated that to keep the global temperature increase below 1.5 degrees Celsius above the pre-industrial level, we need to invest USD 500 billion per year into new renewable energy deployment by 2030. Recognizing that mobilizing so much capital is one of the biggest hurdles to achieving these goals, innovative mechanisms that support the energy transition through project financing and bankability will be crucial in the next few years. But with government subsidies declining in most markets around the world, projects are struggling to attain financing and manage operating costs, acting as a further dis-incentive for capital markets. One of the key ways to attract (and keep) investment in this sector, with particular emphasis in the unsaturated emerging markets, is to de-risk investments by improving transparency and credibility. Through innovative technologies like blockchain and related the digital solutions of the Internet of Things and artificial intelligence, we can mobilize climate finance and enhance measurement, reporting and verification to scale renewable energy deployment globally.
To attract financing for renewables, we need to:
Identify non-traditional mechanisms to invest (microfinance lending, tokenization of assets, democratization of investments) and attract climate finance
Support bankable revenue streams for project developers, particularly in high-risk or developing economies (PPAs, ePPAs, EACs, green bonds) through liquid and trustworthy market mechanisms
Provide transparency of investment resources and offer accountability of project initiatives, including monitoring and evaluation of efficiency
How Can DLT Technology Support Climate Finance?
Blockchain is a technology platform operating as a database of data that every participant on the database has equal responsibility for ensuring validity of. Based on the use of digital signatures through asymmetric cryptography, it maintains a continuously growing database of records, protecting the whole transaction history from being tampered with, even by their operators. For each blockchain network, there is a common database to which all parties can propose changes and the network itself will validate in a complex computational process called “consensus”, preventing fraudulent or incorrect data from being recognized as valid. Everyone connected to the network has an identical copy of the data stored on the database, enabling seamless audit capacity with an indisputably groundbreaking level of transparency. There are no intermediaries responsible for ensuring consensus which lends to its integrity and trustworthiness. It is precisely because of this technical rigor that blockchain technology has real transformative potential.
To add to its structural genius, using a distributed database, like the blockchain, parties can confirm that an event or condition has occurred without the need for a third-party verifier. ‘Smart Contracts’ represent the implementation of a contractual agreement, whose legal provisions have been formalized into source code, allowing for an automatically executing contract without the ambiguity of words or trusted third-party. This enables independent and untrusted parties to freely transact with one another — without the technical need, time-intensive administration, or costly professional fees — to enter into a standard contractual arrangement.
Blockchain may be an apt solution to overcome centralized structures while remaining reliable and secure, helping to aggregate new stakeholders into the climate finance circle by reducing complexity. Startups are launching voraciously, many of which are optimized for smart phone applications that open up the climate finance landscape to an entirely new community. Presently there are upwards of 200 companies in the clean energy space using blockchain, with well over USD 500 million invested in these projects in 2018 alone. This number is projected to skyrocket to USD 18 billion by 2025.
Non-Traditional Financing Mechanisms
Token crowd sales are opening up an entirely new asset class to accredited and retail investors, in a sector that has traditionally been the exclusive domain of institutional investors. Crowd funding and Security Token Offerings are now being used as a way to raise capital for infrastructure, with tokens representing either decentralized asset ownership or property rights to future discounted electricity. This emerging project financing mechanism democratizes investment, along with providing transparency and credibility to higher risk markets.
Companies such as WePower help projects to raise capital by allowing consumers to purchase project-related tokens they may redeem for discounted future electricity, trade or sell. The end result is a multidimensional platform that has the potential to create a smarter, cleaner grid. By introducing and connecting developers and investors, they aim to make green investments fast, liquid and economically viable.
Alternative Financing for Emerging Markets
Access to climate finance is an obstacle for many developing markets because they cannot meet the stringent accreditation requirements for international climate funds, and it can take years for climate projects to obtain funding through non-traditional intermediaries. DAO IPCI, and other similar blockchain-based platforms issue and trade green financial instruments with the aim to bring climate finance to unbanked areas. These blockchain solutions for verification, issuance, and trading in green finance instruments use smart contracts that execute automatically, minimizing the risk of human intervention-related fraud.
The Sun Exchange, a peer-to-peer solar equipment leasing marketplace in South Africa, leverages the blockchain to increase transparency and reduce costs of cross-border transactions. A consumer can remotely purchase solar cells and earn rental income from them, with asset ownership recorded immutably on the blockchain. They receive dividends through cryptocurrencies — called ‘streaming monetized sunshine’ — helping to electrify developing markets and receiving consistent payments over time. It works similarly to crowd-funding as the project will only proceed once the solar cells have been sold, and Solar Exchange arranges the equipment leases for investors and revenue collection via blockchain. Investors earn a passive stream of rental income for approximately 20 years.
And another startup called Bitlumens brings electricity from renewable sources to women in rural villages in Latin America. The startup provides solar panel hardware leases to women who pay installments denominated in Bitlumens tokens. This allows them to build a credit score, leading to long-term financial inclusion and economic improvement. Family members can send remittance via the blockchain which cover the expenses of the panels, thereby encouraging a trusted feedback loop of a micro-economy.
In sub-Saharan Africa, more people have mobile phone subscriptions — about 700 million — than access to reliable electricity — about 450 million. The same is true for many developing markets in Asia. This phenomenon exists because wireless telecommunication allowed countries to leapfrog expensive industrial architecture in exchange for cellular towers and accessible handsets. The concept behind distributed power systems and microgrids plans the same for electricity. The infrastructure required to connect to a state-run grid is likely decades away in many remote regions in Africa and Asia, but installing cheap transmission lines between rural villages is far more near-term. In fact, the price of microgrid electricity often even beats out centralized grid costs when accounting for the cost of customer connections. Decentralized systems powered by solar can deliver the power connections necessary to elevate these regions into economic participation.
Dozens of examples have surfaced around the globe, combining solar panels, diesel generators and battery storage, with cheap and simple distribution lines. Many companies are working on innovative ways to finance this, most frequently relying on microfinance and microloans, distributed and monitored via the secure blockchain technology. Blockchain-and-AI-supported microloans help by drawing signals about likelihood of loan repayments, resulting in over 90% repayment rates and loan acceptance rates of 50% — significantly higher than traditional financial institutions. This means consumers no longer require banking status to make regular electricity payments, and suppliers can confidently manage electricity according to receipt of payment. The technology can verify a borrower’s identity, create trusted credit histories, enable the sharing of sensitive data, ultimately facilitating quicker flows of capital.
ImpactPPA operates distributed microgrids through brown-field installation, where they replace expensive diesel generators that prevent villages from having constant power. They build out microgrids by tapping into the local substation to distribute power with a generator as a backup. Financed by local governments or securitized privately by institutions, they use the blockchain to reconcile the transaction from an end-user via a mobile device. Given that each panel is kitted with a smart meter and payment is connected through an individual’s mobile, this structure helps to provide identity attributes that are traditionally impossible to calculate from the unbanked.
Alternative Revenue Streams
EACs have the potential to stimulate renewable investment and offer liquidity to unregulated markets, particularly in less mature regions like Asia, the Middle East and Latin America. Due to aggravating factors like political uncertainty, unclear regulatory frameworks, inexperienced developers and general opacity in financial systems, corporate PPAs have yet to stake their territory. With limited or no government subsidies, no compliance-based EAC schemes, and limited access to registries, many project developers in immature markets never realize the value of their environmental attributes.
The challenges faced by the EAC market, particularly in developing economies, often surround transparency, verified property rights, ease of transaction, upfront costs associated with certification and market liquidity. Companies like Reneum uses blockchain technology to address all of these concerns. By facilitating a more structured and transparent process when monitoring emissions reductions initiatives and cross-border investments, blockchain presents an optimal solution to matters like double counting and additionality, as are hotly debated under Article 6 of the Paris Agreement. Double counting is a significant concern in an ecosystem with a wide array of participants, each following their own rules with limited exchange of information between them. Blockchain has the capability of mitigating these risks by increasing transparency, enhancing traceability of financial flows, and monitoring of credits to ensure the same resource is not accounted for twice. The absence of intermediaries makes the issuance of verified carbon reductions and environmental attributes up to 10 times cheaper than in the traditional paper markets. By unlocking a trusted global market for environmental attributes, the blockchain helps renewable energy generators yield the full economic value and social benefit of their attributes.
De-risking Investments through KYC
Blockchain can support the validation of identification — including KYC — and ownership of assets to facilitate access to capital and de-risk infrastructure investments. One of the key ways to attract and increase investment in emerging markets is to de-risk real and perceived investment risks by improving transparency and credibility through innovative technologies including blockchain and related digital solutions such as the Internet of Things and Big Data. Together, these tools can help mobilize climate finance and enhance measurement, reporting and verification (MRV) to scale climate actions for both mitigation and adaptation. Also in Africa, M-KOPA uses embedded mobile technology to remotely control their solar grid system. If payments are late, then the system is automatically disabled until the customer catches up.
Monitoring of Investment
EcoKraft GmbH developed social investment platform that collects energy consumption data from smart meters in households in developing countries and sends through SIM cards to Germany. This provides the information on the economic viability of mini-grids to investors to finance them. Blockchain enables transparent investment and risk management through forecasting future cashflows. Investors can track their investment at any stage, receiving performance and operational metrics on-demand through blockchain reporting platform.
So What is the Future?
The blockchain promise has led many to believe that its disruptive potential is akin to that of the Internet. While the technology itself is very much still in beta mode, the application potentials are nearly endless, and if applied tactfully and coupled with other dynamic technologies like artificial intelligence, it may indeed open up entirely new markets for the future power sector. It’s absolutely critical that we scale up climate finance, and if blockchain can be the catalyst for this, all hail the blockchain!