How Micro-Securitizations Can Bridge the Clean Tech Funding Gap

By Si Chen, President, Open Source Strategies, Inc.

Si Chen has a background as a hedge fund manager and open source software developer. Si is working on leveraging finance and open source software to make clean energy a reality everywhere.

Dec 17, 2019 | Economy, Resources | 2 comments


Who will you meet?

Cities are innovating, companies are pivoting, and start-ups are growing. Like you, every urban practitioner has a remarkable story of insight and challenge from the past year.

Meet these peers and discuss the future of cities in the new Meeting of the Minds Executive Cohort Program. Replace boring virtual summits with facilitated, online, small-group discussions where you can make real connections with extraordinary, like-minded people.


 

We’ve lived in a fairy tale world of easy energy all our lives.

Our utilities and regulators have worked hard to provide us with nearly unlimited energy at stable, low prices. They’ve shielded us from volatile fuel prices, protected us from the dramatic swings of wildcatting for oil and gas, and softened the escalating cost of building new generators. No wonder the average American spends just eight minutes a year thinking about energy!

But this fairy tale world is coming to an end.

In their efforts to protect consumers from higher capital costs, utilities have racked up more and more debt and weakened their credit. Storms, wildfires, record heat waves, and cold fronts are pushing our electricity grids to the limit. The general public is demanding a wholesale shift to zero carbon energy to stop climate change. Meanwhile, new technologies are starting to erode the utilities’ traditional monopolies.

Experts tell us that we’re headed to a world of distributed energy: solar, wind, storage batteries, smart energy management systems installed “behind the meter” at homes and buildings. When we go out there to make this happen, though, we often run into the Problem of Bob and Bob.

Two problems arise because business and residential customers are still living in that fairy tale world of cheap, easy energy.

First, they’re not used to thinking about energy. Energy was something they always took for granted, and energy must continue to be easy for them. For new energy technologies to gain mass adoption, they must protect their customers from risks just like utilities and regulators do, even if the new risks are how often the sun will shine or the wind will blow.

Second, somebody else has to pay for it. It’s not going to be the consumer. They’re used to getting as much energy as they need without ever investing in energy production. It probably won’t be the utilities either: not only has their creditworthiness weakened over the years, but the sheer amount of capital required dwarfs the size of the utilities industry.

Sources: GreenTech Media, S&P, SIFMA

Fortunately, there is a tool that has been able to help reduce risks while providing capital at scale: securitization. Around since the 1970’s, securitization raises capital at scale by aggregating large numbers of similar assets together and creating liquidity for potential investors. At the same time, it can shield most of those investors from risks they don’t understand by splitting the cash flows of the assets into multiple tiers of securities.

This combination has opened up previously illiquid and poorly understood assets to a broad universe of investors. Those investors have, in turn, rewarded borrowers with lower rates, flexible terms, and access to virtually unlimited capital. From its beginnings with residential mortgages, securitization has now become the preferred way to raise capital for most consumer loans, mortgages, and commercial mortgages, and it’s even used to fund cell phone receivables, timeshares, and RV’s.

The challenge for securitizing clean energy assets is that most of the technologies are new, so there is a lack of data to help investors understand the potential risks. This then creates a chicken and egg problem: until we bring enough assets together, investors would not be incentivized to learn about their risk and return profiles. But until we have access to capital, new and innovative clean energy technologies would not scale to sufficient volumes needed for investors to learn them.

New technologies based on the blockchain could solve this problem. Blockchain’s combination of smart contracts and tokens could allow us to perform all the tasks of securitization, but at smaller scales — think mini, micro, and nano-securitizations. We could go down as far as each individual installation for solar, wind, storage, energy efficiency, or grid services and split up the risks. Then we could aggregate the senior or enhanced classes from all these different assets, with their specific technology and project risks removed, back up into one master structure and fund it in the securitized debt markets to get the best rates.

Here’s how securization of renewable energy assets could work:

  1. We get device level data, for example from smart meters, inverters, or building automation systems (BAS).
  2. An M&V process proves that the technology produced value, in the form of energy generated or energy saved. This process could include an escrow period during which parties in the contract could request a manual review.
  3. At the end of the M&V process, pay out is automatically made into the tokens on the blockchain.
  4. A smart contract on the blockchain exchanges the tokens from the energy technology for two new tokens, a class A senior token and class B subordinated token. The smart contract will automatically allocate all the value from the energy technology to the class A senior token first, and will only allocate value to the class B subordinated token afterwards.
  5. The senior class A token could be combined into a securitization pool and sold to debt investors, raising capital at favorable rates.
  6. The subordinated or credit enhancement class B token could be retained by the technology service provider or split with the owner as a shared incentive. Eventually they too could be sold to specialty investors seeking high returns to raise more capital.

The result is to remove energy risk and provide capital for consumers, so they could continue to enjoy low-cost, risk-free access to energy. At the same time, we could aggregate projects from different energy technologies, locations, and customers together in a pool large enough for securitization. As long as the sizing of the subordinated class B tokens are large enough, these investors are effectively shielded from technology, site, or project specific risks.

From a macro level, such a financing structure provides capital at scale for clean tech companies to offer energy as a service, just like the utilities have done. Their micro utilities could overcome Bob and Bob’s objections, and deliver efficient clean energy, thanks to a combination of new energy technologies, the blockchain, and micro-securitization. The future of distributed energy would then finally be within sight.

Discussion

Leave your comment below, or reply to others.

Please note that this comment section is for thoughtful, on-topic discussions. Admin approval is required for all comments. Your comment may be edited if it contains grammatical errors. Low effort, self-promotional, or impolite comments will be deleted.

2 Comments

    • Yes, Ed, I definitely think so. It could work with a variety of M&V methodologies, like CalTrack or those used for MEETS. If you’re working on any of them, please drop me a note, and we can chat more!

      Reply

Submit a Comment

Your email address will not be published. Required fields are marked *

Read more from MeetingoftheMinds.org

Spotlighting innovations in urban sustainability and connected technology

No Equity, No Resilience: Minneapolis is All of Us

No Equity, No Resilience: Minneapolis is All of Us

This article was originally published on September 8, 2020.

Update for April 20, 2021:

After the murder of George Floyd we wrote this article as a kind of blueprint, a beginning to a new way of working with equitable resilience in our cities and beyond. Now, as the trial of Derek Chauvin comes to a guilty verdict in Minneapolis and the whole country reflects on the legacy of that verdict, we have to remember another senseless murder – another young Black man, Daunte Wright, at the hands of law enforcement, just miles from the courthouse. Again, Minneapolis is all of us. We have protested, we have voted. We stood up, we spoke out, we have raged about the anti-Black racism. We have seen people come together, we can feel a shift in this country. But there is so much more to do. No equity, no resilience.

-Ron & Stewart

How Affordable Green Housing Enhances Cities

How Affordable Green Housing Enhances Cities

Housing that is affordable to low-income residents is often substandard and suffering from deferred maintenance, exposing residents to poor air quality and high energy bills. This situation can exacerbate asthma and other respiratory health issues, and siphon scarce dollars from higher value items like more nutritious food, health care, or education. Providing safe, decent, affordable, and healthy housing is one way to address historic inequities in community investment. Engaging with affordable housing and other types of community benefit projects is an important first step toward fully integrating equity into the green building process. In creating a framework for going deeper on equity, our new book, the Blueprint for Affordable Housing (Island Press 2020), starts with the Convention on Human Rights and the fundamental right to housing.  

The Pandemic, Inequality, Housing Affordability, and Urban Land

The Pandemic, Inequality, Housing Affordability, and Urban Land

Since the Great Recession of 2008, the housing wealth gap has expanded to include not just Black and Brown Americans, but younger White Americans as well. Millennials and Generation Z Whites are now joining their Black and Brown peers in facing untenable housing precarity and blocked access to wealth. With wages stuck at 1980 levels and housing prices at least double (in inflation adjusted terms) what they were 40 years ago, many younger Americans, most with college degrees, are giving up on buying a home and even struggle to rent apartments suitable for raising a family.

What makes it hard for policy people and citizens to accept this truth is that we have not seen this problem in a very long time. Back in the 1920s of course, but not really since then. But this is actually an old problem that has come back to haunt us; a problem first articulated by Adam Smith in the 1700s.

The Future of Cities

Mayors, planners, futurists, technologists, executives and advocates — hundreds of urban thought leaders publish on Meeting of the Minds. Sign up below to follow the future of cities.

You have Successfully Subscribed!

Wait! Before You Leave —

Wait! Before You Leave —

Subscribe to receive updates on the Executive Cohort Program!

You have Successfully Subscribed!

Share This