Financial Mechanisms Developing to Spur More Clean Energy Investment

Illustration of Financial Mechanisms to Aggregate Developers and Disaggregate Offset Buyers

Key Points: following the UN Environment Program’s (very helpful) review of blockchain solutions for energy access published last month, we highlight innovations that can facilitate smaller, private sources of investment in clean energy development and obstacles to blockchain deployment.

Innovations focus on developing/deepening markets. Several innovations are directed at (1) specifically creating more green electricity attribute certificates, such as Renewable Energy Certificates (RECs) that meet international standards (I-RECs) that can be readily traded and retired and (2) facilitating carbon trading more generally. This post highlights four such innovation examples, functioning at different stages of clean energy/carbon allowance development. Three involve blockchain, are reviewed in the aforementioned UNEP report and are depicted in the graphic above.

Financing small clean energy developers by pooling (aggregating) them into larger “units”… Distributed Renewable Energy Certificates (D-RECs), being developed by Positive Capital Partners and South Pole, seeks to aggregate small off-grid sources of power, managing data tracking and allowing the pooled power to meet the same standards set for issuing I-RECs. D-REC issuance thus allows the environmental benefits of distributed renewable power to be traded on international exchanges, while the purchase of D-RECs provide additional financial support for distributed power developers, which encourages additional investment.

…And financing small clean energy developers by disaggregating investors. Blockchain seeks to use self-auditability to build trust and reduce transaction costs (the latter by obviating the need for middlemen). It also allows for fractionalization of ownership, allowing for disaggregating of investor sponsors. One illustration of how this has been put into practice in clean energy is The Sun Exchange, which evaluates projects, “crowd-sells” the equipment (panels) and then organizes the collection and distribution of payments from customers to developers and their financial sponsors.

Using blockchain to facilitate generating RECs. Here, again, the promise of blockchain is to dis-intermediate the process of verifying the attributes of I-RECs in order to save costs and, plausibly, improve trust, while scaling up their number. The UNEP report highlights the efforts of Energy Web Foundation’s Energy Web Origin offering. EW Origin has piloted systems for registration (of sellers and buyers), REC issuance and trading. In one pilot in Turkey, for example, the blockchain platform based on EW Origin technology offers hourly generation data on licensed plants, enabling I-REC issuance on the same platform.

Using blockchain to facilitate carbon credit/offset trading. As Voluntary carbon markets are considered highly inefficient because of complex regulations that vary from market to market, complicate trading procedures and (as a result) have high operating costs and low liquidity. (Source). Blockchain offers the promise of streamlining regulation and enhancing liquidity, again based on the premise of enhancing data traceability and “tokenizing” offsets. An example of a blockchain carbon trading platform being piloted is the ECO2 Ledger in China. The trading platform uses carbon credits that are verified according to the Verified Carbon Standard. Notably, the platform claims to improve individual purchasers’ ability to open and see/transact, through a mobile app called MyCarbon.

Addressing the challenges with Blockchain. Well-advertised issues related to blockchain  — energy consumption and security — are, of course, as relevant for energy development applications as for any other. Further, blockchain applications are predicated on standardized procedures and as much standardization of contracts (e.g. Power Purchase Agreements) as possible, which implies the policy makers internationally need to coordinate to set as clear terms as possible. Related but not directly associated with Blockchain, utilities must be allowed/made to purchase off grid power to support renewable energy growth.

2/23/2022