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Published on September 6th, 2012 | by John Farrell

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Crowdfunding for Community Power?

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September 6th, 2012 by  

 
Back in April, President Obama signed the JOBS Act, and one of the most-heralded elements was so-called crowdfunding. The law sought to solve a major problem, that it’s hard to finance small-scale business ventures. Wall Street only cares about multi-million-dollar plays, and securities regulations make small-dollar projects rather difficult (and costly) to jointly fund.

The Act could have big implications for community-based renewable energy projects.

Right now, there are two kinds of community-based renewable energy projects, the charitable and the persistent.  Solar Mosaic, for example, was founded and funded on the concept that many environmentally-motivated people would help finance local solar projects with 0% interest loans. They succeeded in building several projects, but the model is constrained by the limited universe of people who have money at hand and are willing to let it be used for no reward.

The other kind of renewable energy project allows participants to get some kind of financial reward through sheer persistence, overcoming enormous regulatory and legal barriers to success (some of which I covered in this 2007 report). It means finding a complex legal structure to capture federal tax credits despite needing investors with “passive tax liability,” or sacrificing federal incentives for simple ownership structures like cooperatives or municipal utilities. It means having “accredited” (rich) investors, or only soliciting investors through personal relationships. This community wind project is an illustration, as are several solar projects in this report.
 

 
The JOBS Act may finally allow thousands of regular folks to make a modest return (5-10%) by investing in local renewable energy projects. The Act allows for crowdfunding under the following circumstances:

  • The project raises less than $1 million
  • The project owner discloses certain financial information, such as income tax returns, financial statements reviewed by an accountant, or fully audited financial statements.

The $1 million limit is the approximate cost of a 200-kW solar project, so crowdfunding could mean a significant boost for community-based solar arrays, especially in states with virtual net metering (allowing those potential investors to share the electricity output).

Crowdfunding won’t mean much for wind projects, where a single turbine costs well over the dollar limit, but the JOBS Act also opened the door for more community-based wind with changes to SEC exemption Regulation A.  (For more on this, read my 2007 report on wind energy ownership, and then this article on the changes to Regulation A).

It’s not all roses and unicorns.  There are still several potential hangups for the crowdfunding model:

  • The SEC still has to implement the new regulation (likely in early 2013).
  • Websites that host crowdfunding opportunities (e.g. Kickstarter) will have to comply with new regulations.
  • The information disclosure requirements for potential project owners mentioned in the Act are not insignificant.
  • Upfront costs such as legal fees, even for a modest crowdfunding venture, could still be $10,000 to $15,000.
  • It’s not clear how crowdfunding solves the problem of capturing federal tax incentives.

I’ll be interested to see how it develops.

This post originally appeared on ILSR’s Energy Self-Reliant States blog.

Photo Credit: Hepburn Wind

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About the Author

directs the Democratic Energy program at ILSR and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. His seminal paper, Democratizing the Electricity System, describes how to blast the roadblocks to distributed renewable energy generation, and how such small-scale renewable energy projects are the key to the biggest strides in renewable energy development.   Farrell also authored the landmark report Energy Self-Reliant States, which serves as the definitive energy atlas for the United States, detailing the state-by-state renewable electricity generation potential. Farrell regularly provides discussion and analysis of distributed renewable energy policy on his blog, Energy Self-Reliant States (energyselfreliantstates.org), and articles are regularly syndicated on Grist and Renewable Energy World.   John Farrell can also be found on Twitter @johnffarrell, or at jfarrell@ilsr.org.



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