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Crowdfunded solar feasiblity study

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A solar garden is based on a relatively new business model best described as community owned solar—people within a community enthusiastic about solar, pool their capital, use it to purchase an array and, via a special purpose entity, have it installed and maintained on a host site which is either paid rent for the use of its property or enters into a power purchase agreement with the SPE for purchase of the energy generated by the array.

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Crowdfunded solar feasiblity study

  1. 1. 1 Master Dissertation of Jinan University A Feasibility Study on Community Solar Gardens in China Author’s Name: Zayn Abdullah King Dollie Supervisor’s Name: Prof. Wang Guoqing 王国庆 Ph.D. Professor Master of Business Administration (MBA) Submission date: 16 April 2015 Date of defense: 11-20 May 2015 Chairman of the defense committee: Paper Reviewer: Degree-conferment authority and
  2. 2. 2 Originality statement I declare that the academic paper submitted is the achievements of the research carried out by me under the guidance of the supervisor. To the best of my knowledge, except for the special annotations and acknowledgements, the paper does not contain the research outcomes published or written by other people have, nor materials already used to obtain academic degree or certificate of Jinan University or other educational institutions. Any and all contributions to this research made by my coworkers have been described and recognized herein. signature of author: Zayn Abdullah King Dollie Date of signature: March 27, 2015 License of Copyright to Academic Paper The author of the academic paper fully understand the provisions promulgated by Jinan University for reservations and use of the academic papers, and is entitled to retain and submit the copy and disk of the paper to the relevant national departments or agencies concerned and allow access to them. I hereby authorize Jinan University to incorporate the academic paper in whole or in part into the relevant database for retrieval and to save and compile the academic paper by photocopy,microprint or scan. (This license is not applicable to an encrypted academic paper until decryption) Signature of author: Zayn Abdullah King Dollie Signature of Supervisor: Signing Date: Signing Date: Graduation destination of the author: Employer: Tel: Mailing address: Zip Code:
  3. 3. 3 Abstract A solar garden is based on a relatively new business model best described as community owned solar—people within a community enthusiastic about solar, pool their capital, use it to purchase an array and, via a special purpose entity, have it installed and maintained on a host site which is either paid rent for the use of its property or enters into a power purchase agreement with the SPE for purchase of the energy generated by the array. The array is owned by the subscribing community members (subscribers) throughout the length of the PPA. The PPA contract can be up to twenty years. Subscriber ROI comes either via the sale of the power generated back to the grid for the wholesale power rate (feed in tariff); or via the sale of the power generated back to the host, usually at some discount to the retail rate. After twenty years the subscribers should have experienced payback and a sufficient IRR, then ownership of the panels flips to the host. A third alternative involves virtual net metering and the cooperation of the utility to implement energy (kWh) or monetary ‘bill credits’ which constitute subscriber return. This is the original solar gardens idea however at the moment it is not feasible in China. Community owned solar has the potential to work in China via an equity-based crowdfunding model. Pollution and climate change are both problems that Chinese national government policy is trying to combat via enormous solar capacity targets and favourable policies for distributed solar developers. Incentives have been designed so that payback on distributed projects could be as low as 5-8 years and internal rates of return as high as 12-17%. Financing solar arrays is usually problematic, however ‘the crowd’ in China is a huge source of untapped capital with CNY74 trillion in bank savings. Developing a compelling value proposition for potential investors could not only lead to a lucrative business opportunity but the chance to contribute to the greening of China’s energy mix. Before turning to the crowd it will be important to build trust and credibility via a suitable pilot project such as an array on a university building funded by students, faculty, departments etc. Successful carrying out of the pilot should attract interest from the crowd and other investors in future projects. Key words: distributed solar, solar, crowdfunding, power purchase agreement, energy performance contracting, renewable energy, impact investing 太阳能花园乃是基于一个相对新的生意模式,最好的形容词是社区所拥有的太阳能(光伏)- 社区里 的人热衷于太阳能,集中他们的资金,用它来购买一个太阳能电池板,并通过一个特定目的的实体 (SPE),让它安装和接受维护于一个主机站,要么是支付租金使用其财产或与特定目的实体 SPE 签订
  4. 4. 4 一电力购买协议,购买由太阳能电池板产生的能量。该太阳能电池板由订用的社区成员(用户)在整 个电力购买合同(PPA)的运营过程中所拥有。 PPA 的合同可以长达二十年。用户的投资回报率或者 通过回馈到电网的产生电力之批发价(上网电价)的销售;或经由出售回馈到电力主机站的电力,通常 是一些打折到零售的价格。二十年后,用户应该已经历投资回报和充足的内部收益率 IRR,那么所有 太阳能电池板的所有权就回归到主机站。第三种选项是涉及虚拟净计量和实施能源(千瓦时)效用的 合作,或构成用户回报的货币“账单值”。这是原始的太阳能花园构想,目前在中国是不可行的。社区 拥有的太阳能在中国具有通过股权为基础的众筹基金模式的奏效潜力。污染和气候变化问题都是中国 政府通过巨大的太阳能发电量目标,与分布各地的太阳能开发者的优惠政策,所要试图打击的国家政 策。激励机制已设计出来,使分布项目的回报可低到 5-8 年,内部收益率则高达 12-17%。融资太阳能 电池板通常是有问题的,然而中国民间的‘群众’,乃是人民币 74 万亿银行储蓄的巨大未开发资源。 为潜在投资者开发一个引人注目的价值提议,不仅可以导致一个利润丰厚的商机,同时也有助于中国 能源结构的绿化。转向群众之前,通过合适的试验项目建立信任和信誉很重要,例如在大学建筑物上 面架设一个太阳能电池板,由学生,学系,部门等资助。成功的试点项目应该可以吸引群众的兴趣和 其他投资者投资未来的项目。 关键词:分布式太阳能,太阳能,众筹,购电合同,能源管理合同,可再生能源,影响的投资。
  5. 5. 5 Table of contents Abstract ...........................................................................................................................................3 Table of contents .............................................................................................................................5 List of figures and tables .................................................................................................................7 Section 1..........................................................................................................................................8 1 Introduction...............................................................................................................................8 2 Community solar gardens .......................................................................................................15 2.1 Solar Mosaic Co..................................................................................................................16 2.2 Serving an expanding market niche.......................................................................................17 2.3 First large scale success story...............................................................................................19 2.3.1 Wildwoods Convention Center.......................................................................................19 2.3.2 Roll out.........................................................................................................................20 2.4 Current Chinese business model...........................................................................................21 2.4.1 Energy performance contracting .....................................................................................21 2.4.2 Recent Solar EPC projects in China ................................................................................22 2.4.3 Returns on EPC projects ................................................................................................25 2.5 Proposal for China ...............................................................................................................25 3 China’s green energy industry development and policies ......................................................30 3.1 Environmental Consequences...............................................................................................30 3.2 Coal....................................................................................................................................32 3.3 Government response...........................................................................................................33 3.4 Solar power.........................................................................................................................35 Section 2........................................................................................................................................37 4 Feasibility study......................................................................................................................37 4.1 Purpose...............................................................................................................................37 5 Market Analysis ......................................................................................................................39 5.1 Demographics .....................................................................................................................39 5.2 Market needs.......................................................................................................................42 5.3 Crowdfunding .....................................................................................................................44 5.4 Market trends......................................................................................................................46 5.5 Market growth.....................................................................................................................48 5.6 SWOT analysis ...................................................................................................................49 5.7 Industry Analysis.................................................................................................................51 5.8 Product offering ..................................................................................................................57 5.9 Crowdfunding keys to success..............................................................................................59 6 Marketing strategy ..................................................................................................................62 6.1 Market research...................................................................................................................62 6.2 Segment and positioning ......................................................................................................65 Section 3........................................................................................................................................67 7 Policy analysis.........................................................................................................................67 7.1 Crowdfunding .....................................................................................................................67 7.2 Solar...................................................................................................................................71 7.3 Financial incentives .............................................................................................................72 7.4 Tax incentives .....................................................................................................................74 8 Organizational structure..........................................................................................................75 8.1 Entity choice .......................................................................................................................75 8.2 Start up...............................................................................................................................76
  6. 6. 6 8.2.1 Regarding pilot projects .................................................................................................76 8.2.2 Regarding hosts .............................................................................................................77 8.2.3 Technology partner vs. utilising existing platforms ..........................................................77 8.2.4 Costs ............................................................................................................................78 8.2.5 Timeline .......................................................................................................................78 8.3 Solar project approval process..............................................................................................79 8.3.1 Regarding provincial approval........................................................................................80 9 Technical analysis...................................................................................................................81 9.1 Potential sites ......................................................................................................................81 9.2 Host site considerations........................................................................................................84 9.3 Energy usage.......................................................................................................................88 9.3.1 Net metering .................................................................................................................88 10 Financial analysis .................................................................................................................91 10.1 Assumptions and inputs .....................................................................................................91 10.2 Economics and performance...............................................................................................95 11 Issues ....................................................................................................................................97 Section 4......................................................................................................................................101 12 Conclusions and Recommendations...................................................................................101 Notes............................................................................................................................................106 References ...................................................................................................................................107 Appendices..................................................................................................................................112 Appendix A Characteristics of different crowdfunding models.......................................................112 Appendix B Impact investors in China .........................................................................................113 Appendix C Financial incentives..................................................................................................114 Appendix D JV information.........................................................................................................116 Appendix E Business establishment .............................................................................................117 Acknowledgements .....................................................................................................................121
  7. 7. 7 List of figures and tables Figure 4-1 Investment and return................................................................................................................................8 Figure 4-2 Shared solar cash and energy flow........................................................................................................14 Figure 5-1 Solar Mosaic investment model..............................................................................................................16 Figure 5-2 Solar Mosaic Project Offerings...............................................................................................................18 Figure 5-3 Wildwoods Convention Center NJ........................................................................................................19 Figure 5-4 Wildwoods Convention Center Solar Installation.........................................................................20 Figure 5-5 Solar Mosaic's Wildwood Convention Center ................................................................................21 Figure 5-6 DuPont R&D Centre Shanghai Solar Installation .........................................................................23 Figure 5-7 Turpan Airport Solar Installation...........................................................................................................24 Figure 5-8 Midea Group Shunde Solar Array.........................................................................................................25 Figure 5-9 Proposed EPC model for China..............................................................................................................27 Figure 6-1 Emissions of carbon dioxide from energy, annually and cumulatively..............................31 Figure 6-2 China's installed electricity capacity by fuel 2012 (total 1,145GW) ...................................32 Figure 6-3 Direct carbon dioxide intensities of different Chinese industries (2007) ..........................32 Figure 6-4 PM2.5 AQI scale............................................................................................................................................33 Figure 6-5 Global investment in renewable energy by region 2013 (US$billion) ...............................34 Figure 6-6 China Solar PV Installations to 2015 (GW).....................................................................................36 Figure 8-1 There are 3 main types of financial services consumers in China ........................................41 Figure 8-2 Yield comparison: Yu'e Bao vs. Li Cai Tong vs. Chinese banks ..........................................43 Figure 8-3 The crowdfunding ecosystem..................................................................................................................45 Figure 8-4 Crowdfunding potential by region.........................................................................................................48 Figure 8-5 Market potential for crowdsourcing across the developing world ........................................49 Figure 8-6 Unique product offering .............................................................................................................................58 Figure 8-7 Four elements of a robust crowdfunding investing ecosystem...............................................59 Figure 9-1 Areas of improvement highlighted by investors ............................................................................63 Figure 12-1 Baiyun airport................................................................................................................................................82 Figure 12-2 Guangzhou South Railway Station.....................................................................................................82 Figure 12-3 Canton Fair Site............................................................................................................................................82 Figure 12-4 Baiyun International Convention Centre.........................................................................................83 Figure 12-5 Guangzhou Library.....................................................................................................................................83 Figure 12-6 Guangzhou Museum..................................................................................................................................83 Figure 12-7 Solar resource in China ............................................................................................................................84 Figure 12-8 In front of the meter vs. behind the meter.......................................................................................89 Figure 13-1 Installed price of residential and commercial over time..........................................................91 Figure 13-2 US estimated installation cost breakdown......................................................................................92 Figure 13-3 International installed cost comparison............................................................................................92 Figure 15-1 Jinan University Library rooftop space .........................................................................................103 Table 6-1 Energy mix of top countries for renewables in 2013.....................................................................35 Table 11-1 WFOE vs. JV...................................................................................................................................................75 Table 12-1 PVWatts inputs...............................................................................................................................................85 Table 13-1 Key assumptions............................................................................................................................................93
  8. 8. 8 Section 1 1 Introduction Concept A solar garden, community solar garden or community shared solar project1, is a renewable energy project designed, implemented and sold with the specific purpose of providing distributed solar energy to subscribing members of a local community. The basic idea is that members of a community buy into a solar array and benefit from its electrical energy output via regular kWh bill credits on their personal or commercial electricity bills. Additionally subscribers may also share in any incentives designed to facilitate the development of renewable energy projects in the region. Thus the buy in is the initial investment and the bill credit and/or share in incentives over the life of the project the ROI. Due to the longevity of the technology (the solar panels), returns typically continue for twenty years or more. Thus subscribing to a share in a solar garden is a long-term investment. Figure 1-1 Investment and return Why invest?  Offset energy bill—by buying into a solar garden project subscribers offset their own carbon fuelled energy usage with energy produced from a clean, green, renewable source—the sun. Subscribers may be environmentally conscious people or entities which desire to be less dependent on the grid, wish to ‘go green’ or simply hedge against the 1 Coughlin, J., Grove, J., Irvine,L., Jacobs, J. F., Phillips, S. J., Sawyer, A., Wiedman,J., A Guideto Community SharedSolar:Utility, Private, and Nonprofit Project Development, National Renewable Energy Laboratory, 2012 available at http://www.nrel.gov/docs/fy12osti/54570.pdf Subscriber buy in Investment Bill credit, PPA, subsidies & FIT ROI
  9. 9. 9 rising electricity rates but for whatever reason are unable to install panels on their own premises (perhaps it is shaded, there is not enough sun, they are renting, they do not plan to be in the premises for longer than the life of the panels, red tape, high costs etc.). The solar garden thus provides these individuals or entities with a solar option by purchasing capacity in an off-site array and ‘virtually’ using its energy output—the actual energy output is either sold back to the grid (for a Feed-In-Tariff, FIT) or to the site host (Power Purchase Agreement, PPA). This process of crediting a subscriber’s bill for kWh produced off site is called Virtual Net Metering, VNM2.  Hedge against price rises—a subscriber in a solar garden project hedges against future energy price rises by virtually producing it’s own energy. If the subscriber receives a kWh bill credit in direct proportion to the amount of energy the subscriber’s share of the panel produces, then this not only represents positive cash flow in the form of energy bills not paid out, but as retail energy rates increase, the monetary value of the kWh bill credit increases accordingly. In China current retails rates are between CNY0.60 and CNY0.80/kWh for residential and CNY0.90 to CNY1.20/kWh for commercial3. It is reasonable to assume that these rates will increase each year (at least to account for inflation). If energy rates rise faster than inflation, this investment hedges against future price rises. Since the subscriber is no longer subject to bill payments, it is not longer subject to rate rises and therefore has hedged against power price increases. If however the subscriber receives a monetary bill credit then it only hedges against the rising wholesale price of electricity i.e. the grid’s variable costs—the subscriber would still be subject to rising fixed costs associated with transmission lines and infrastructure etc.  Capture financial incentives (return)—what makes this project economically attractive in China is the combination of the national production incentive and the FIT, which varies according to the wholesale price of power around the country. This means that, according to national policies, the local utility is obliged to purchase at the wholesale rate (the rate it pays for coal fired power for example) energy from any entity feeding power back into the grid from a distributed solar source. This rate is about CNY0.50/kWh. Furthermore, there is a national production incentive of CNY0.42/kWh. This means that regardless of whether the power is consumed onsite or fed back into the grid, Beijing will 2 Huijben, J.C.C.M. & Verbong, G.P.J., Breakthrough without subsidies?PVbusiness model experiments in the Netherlands, 26 December 2012, Energy Policy 3 Lucia, F., National Policy Initiatives Continue to Fuel Robust Growth in PVmarket for DB Solar Report, 20Jan 2014, available at http://www.dailyenmoveme.com/en/market/china-national-policy-initiatives-continue-fuel-robust-growth-pv-market-db-solar-report
  10. 10. 10 reward any entity this rate for any distributed power it produces. Moreover this is a 20- year agreement. Thus in China distributed energy generators are effectively being paid to be self-sufficient. According to Felice Lucia: “Distributed generation users are awarded a ¥0.42/kwh FIT, which is on top of the reduction in electricity use inherent in having a distributed system. This effectively means that the customer is offsetting their cost of electricity and is being paid ¥0.42/kWh to do so.”4 The FIT and production incentive together serve as a lucrative revenue source. The combined value of the energy produced from a distributed source is 0.42+0.50=0.92 RMB per kWh at the very least. The FIT is a production-based incentive. In the United States there are capacity-based incentives, the main one being the 30% federal tax credit, which effectively reduces the cost of the project by 30% for developers or owners with sufficient tax appetite to capture it. Under China’s ‘Golden Sun Project’ from 2009-13 there were similar production based incentives in the form of up front subsidies5 however it seems these have been phased out in favour of production based incentives. Forecasting the lifetime production of the panels and then calculating the revenue from the sale of that energy constitutes the free cash flow of the project, which is then used to determine the it’s IRR and NPV.  Environmental stewardship—finally subscribers may be motivated by a sense of environmental concern. Solar gardens provide an opportunity for environmentally aware citizens and entities to invest in a scheme that aims to offset coal-fired energy usage. Offsetting up to 100% of an entity’s energy usage with green power sources provides significant opportunity for positive PR (e.g. a university offsetting 50% of its energy usage with green sources could label itself ‘the greenest university in the world’ – which could lead to significant intangible benefit). 4 Lucia, F., National Policy Initiatives Continue to Fuel Robust Growth in PVmarket for DB Solar Report, 20Jan 2014, available at http://www.dailyenmoveme.com/en/market/china-national-policy-initiatives-continue-fuel-robust-growth-pv-market-db-solar-report 5 Xiupei Liang, Lost in Transmission: DistributedSolar Generationin China,August 2014, WilsonCenterChinaEnvironmental Forum
  11. 11. 11 How? In the United States most solar gardens projects would typically cost no less than USD5 per Watt installed, however in China due to the lower labour and materials costs, as well as favourable policies, similar projects could be done for as low as CNY12/W (less than USD2/W) installed6. Thus a 2MW project (2,000,000 watts) for example could require a capital outlay of about CNY24 million. Initial investment is typically the biggest barrier in a distributed solar project. The solar gardens concept is a unique approach, with capital able to be raised a number of ways. a) Financial commitments from subscribers—subscribers commit their full investment to the project and the collection of those funds serve as the capital needed for the project to get underway. It is the job of the Hosting Service Provider (HSP)—the special purpose entity set up to carry out the project—to ‘sell’ it to investors, collect funds and facilitate it’s speedy development. Crucially the HSP would also have to facilitate a VNM agreement with the utility so that subscribers receive their proportional bill credit. b) Anchor investment—alternatively an anchor subscriber, an investor with a large energy appetite subscribes to a large percentage of the array (perhaps 50%), and puts up 100% of the capital needed for the entire project with investors gradually buying in. The anchor’s investment is returned as subscribers buy in. This allows the project to get underway immediately. The anchor subscriber is also able buy up shares of subscribers looking to divest from the project (for example if they leave the region) as well as sell shares to incoming investors looking to subscribe. Ideally the anchor subscriber can provide the host site and may benefit from rental income as well. c) Power purchase agreement—in the event that VNM is not agreed to by the utility, the project can be scaled down such that a host is found with an energy appetite large enough to consume all energy produced by the array. The host then enters into a long term PPA with the HSP. Since the host and the energy consumer are now the same entity rental expense could be reduced or eliminated. Return to subscribers is delivered, not as a bill credit, but monetarily after expenses are deducted. In some arrangement, after payback and a satisfactory IRR is had by subscribers the ownership of the array flips to the host or is purchased at market rate. The host then enjoys ‘free’ electricity for the rest of the life of the panels. 6 personal communicationwith JoyHughes, founder andCEO ofSolar Gardens Institute,10 November2014
  12. 12. 12 Virtual net metering In scenarios a) and b) it is crucial that the local utility agrees to virtually net meter subscribers’ electricity usage. In the US in states where the utility agrees to facilitate the process, energy users’ meters ‘run backwards’ so that they are liable only for their net energy usage i.e. (kWh used – kWh produced)*retail price of electricity. Stakeholders Subscribers—the primary stakeholders in the project with their investment making the project feasible. Investments can be made either in power capacity increments (e.g. per kW) or by the panel (panels typically are 200-300W capacity). Subscribers could be any entity or individual with an energy appetite located within the area served by the array. Host—for a 2MW array an area of about 4-6 hectares or about three full sized football fields are needed. In the US, rental expense is typically no more than US$25,000 per MW per year7. Rent can be minimized or eliminated if the host is a subscriber and land used for the array is gray-field (failing or under utilized real estate or land) or brown-field (abandoned, industrialised sites, water treatment plants, airports, unsuitable farmland etc.). Ensuring green fields aren’t used also maintains the environmental integrity of the project8. Aside from rental income, intangible benefits to the host include positive publicity, fulfilling environmental duties, and perhaps establishing a sense of community pride. Ideal hosts are organizations with large amounts of under utilized space, otherwise unsuitable for commercial, recreational, or agricultural activities and in a location relatively close to grid connectivity points. Anchor investor—the anchor investor is ideally an entity with a government connection that can make the project happen. The anchor investor also has a large energy appetite like an airport, university, water treatment plant etc. and could own up to 50% of the array. As subscribers buy in, the anchor investor is reimbursed (with return). If no anchor investor can be found then the project could possibly be financed with a commercial loan. 7 personal communication with Joy Hughes, founderandCEO of Solar Gardens Institute, 10November 2014 8 Joy Hughes in a personal communicationwith Elana BulmanforherSenior Thesis, March 20, 2012
  13. 13. 13 Hosting Service Provider—the hosting service provider, HSP, is a special purpose entity set up to design, install, and implement the project and sell it to subscribers. After installation it is also responsible for ongoing operations and maintenance, acts as an agent to subscribers, and liaison between them and the utility, with whom it negotiates the FIT and bill credits. It also liaises with the relevant authorities to ensure payment of any financial incentives. Utility—national policy in China states that the utility is obligated to purchase power produced by the array at the rate it otherwise pays the power plant, i.e. the wholesale rate. Apart from diversifying its power supply and alleviating strain on the grid during times of peak demand (especially in summer with intensive A/C usage in Guangzhou), the utility has central government devised obligations to source a certain percentage of its power from renewable energy sources. In the US, crucially the utility is not only responsible for grid connectivity, but also virtual net metering subscribers’ energy usage and billing accordingly. In an ideal scenario all stakeholders are on board. A host is found which will anchor the project and purchase a good portion of the output, forgoing rent for a discounted power purchase agreement. Subscribers make up the remainder of the investment and the utility agrees to credit them for their proportionate share of the power produced by the array. Ideally this is a virtually net metered kWh bill credit which directly hedges rate rises and equates to positive cash flow from day 1; second best is monetary compensation at the full retail rate of electricity (unlikely) or more realistically some negotiated rate between it and the wholesale rate. A special purpose entity is created, the HSP, which facilitates the process and importantly collects production or capacity based incentives and distributes them to investors for a fee. Joy Hughes of Solar Gardens Institute summarises the cash and energy flow below:
  14. 14. 14 Figure 1-2 Shared solar cash and energy flow9 9 Source: Hughes, J., Open Standards for SharedRenewables,2013, Solar Gardens Institute
  15. 15. 15 2 Community solar gardens The solar gardens concept was pioneered in the US where attractive returns on investment largely depend on state and local government capacity and production incentives. A number of schemes and business models exist whereby a group of investors motivated both by environmental stewardship and financial gain pool their capital to build a solar array either on rented land or a host site location, returns coming in the form of either power sales to a host or FIT (production based incentives), as well as other tax incentives (capacity based). Below are two examples. 1. University Park Community Solar LLC10 in Maryland was established in May 2010 and up and running by 22 July the same year. 35 community members formed an LLC collectively investing US$130,315 and facilitated the installation of a 22.77kW system on the roof of a church, which agreed to purchase the 30,442kWh11 generated by the array for 20 years with an option to purchase the installation outright before the term expires12. Apart from PPA revenues, other incentives for subscribers included the federal tax credit/grant, a state grant, accelerated depreciation and sale of renewable energy credits with an expected payback of 5-6 years13. Using financial data available at the website I estimate project IRR at conception of around 12% and simple payback in year 8. However in 2011 market rate for SREC’s was US$350. It has since dropped and averaged around US$185, significantly lowering IRR to around 4.5% and lengthening payback to around year 13. 2. Greenbelt Community Solar LLC also in Maryland saw 30 community members come together to facilitate the installation of a 21.6kW array again on the roof a church. Total funds raised exceeded US$100,000. The PPA with the church is set at 90% of the utility rate escalating as rates rise14. The length of the PPA is twenty years and if not purchased before then ownership flips to the church. With no access to financial data I was unable to estimate payback and IRR. 10 http://www.universityparksolar.com/index.htm 11 http://www.universityparksolar.com/index.htm 12 Coughlin, J., Grove, J., Irvine,L., Jacobs, J. F., Phillips, S. J., Sawyer, A., Wiedman,J., A Guideto Community SharedSolar:Utility, Private, and Nonprofit Project Development, National Renewable Energy Laboratory, 2012 available at http://www.nrel.gov/docs/fy12osti/54570.pdf 13 Coughlin, J., Grove, J., Irvine,L., Jacobs, J. F., Phillips, S. J., Sawyer, A., Wiedman,J., A Guideto Community SharedSolar:Utility, Private, and Nonprofit Project Development, National Renewable Energy Laboratory, 2012 available at http://www.nrel.gov/docs/fy12osti/54570.pdf 14 Dave Konkle, February2014, A Guidebook forCommunitySolar Programs in MichiganCommunities
  16. 16. 16 2.1 Solar Mosaic Co. Solar Mosaic Co. takes the solar gardens concept and scales it up. It is essentially a crowd sourcing investment platform, which investors use to contribute capital to developing any number of solar projects around the country. Solar Mosaic is responsible for selecting, developing and managing the project, navigating the legal environment (in particular dealing with securities law), and ensuring investors receive their return15. The company connects investors with solar projects, facilitating and managing the process for a fee. The model according to the website: Figure 2-1 Solar Mosaic investment model16 Solar Mosaic plays less of a developer role and more of a financier, making low interest loans available to project developers who satisfy their credit and project risk requirements as well as solar leases to entities who choose to lease instead of buy—these entities agree to a PPA with Solar Mosaic for as long as the panels are on their premises. Solar Mosaic’s revenues thus come from management fees paid by investors, loan repayments and lease payments, as well as collection of any other national or state specific financial incentives Solar Mosaic would qualify for. Solar Mosaic has been referred to as ‘the Kickstarter for solar’ because of its unique crowdsourcing model which allows investors to enter the solar market with minimal investment (as low as US$25). Their value proposition is an opportunity for all to participate in and 15 Konkle, D.,A Guidebook for Community Solar Programs in Michigan Communities,February 2014,Great Lakes Renewable Energy Associationunder a grant from theMEDC – Michigan Energy Office 16 Source: https://joinmosaic.com/invest-in-solar
  17. 17. 17 contribute to the development of a growing, environmentally friendly industry while receiving modest but stable, long-term returns—usually in the 4.5-7% range (but could be up to 10%)17 and payback of 5-10 years18. Solar Mosaic’s current strategy is to increase focus on the residential market offering low interest loans and solar leases to homeowners looking to go solar. The competition in the US residential solar loan/lease market is stiff with a number of incumbents including SolarCity, Vivint, Sungevity and SunPower all offering similar services19. On the investor side, while investor returns are modest and only realised over the long term, interest in Solar Mosaic’s solar backed securities is high. It is not uncommon for Solar Mosaic project offerings to sell out within 24 hours and since establishment in 2010, according to their website, they have so far raised over US$10 million in investments and generated almost 28 million kWh in clean solar energy. Solar Mosaic’s product is differentiated in that it takes the community shared solar gardens concept and makes it easy to use, technically sophisticated, and appealing to a young, tech savvy, environmentally conscious demographic that is adept at using online platforms to manage money. On top of this subscribers can pick and choose which project they invest in allowing them to invest in projects visible in their own communities. 2.2 Serving an expanding market niche Solar Mosaic has taken the community owned solar gardens concept, expanded it and turned it into an investment opportunity for anyone—not just those that form a community of geographically close, like minded people as the typical solar gardens project generally requires. Initially, just like Kickstarter20, Solar Mosaic offered individual ‘tiles’ (shares) in a project after which a certain number were sold allowed the project to get underway21. A unique selling point for investors is knowing in exactly what and how much they are investing, as well as their proportional share in the project (see graphic). 17 Bulman, E., Community Solar Models NationwideandPossibilities for New York City, May 2012,Senior Thesis for UrbanStudies Dep. Eugene Language College, The NewSchool University 18 Wang, U., Solar StartupMosaic Counts On Former SunPower ExecFor Growth, 24July 2014,available at http://www.forbes.com/sites/uciliawang/2014/07/24/solar-startup-mosaic-counts-on-former-sunpower-exec-for-growth/ 19 Wang, U., Solar StartupMosaic Counts On Former SunPower ExecFor Growth, 24July 2014,available at http://www.forbes.com/sites/uciliawang/2014/07/24/solar-startup-mosaic-counts-on-former-sunpower-exec-for-growth/ 20 https://www.kickstarter.com/ 21 Wang, U., 13 Solar Startups to Watch in 2013,9 January2013, https://gigaom.com/2013/01/09/13-solar-startups-to-watch-in-2013/
  18. 18. 18 Figure 2-2 Solar Mosaic Project Offerings22 Since kicking off it has evolved into a platform which offers financial products to the online community comprising prospective solar investors anywhere, and on the solar side allowed for the development of projects via low interest loans to project developers and homeowners. The investment is promoted as a safe, low risk, clean and financially attractive vehicle (compared to savings accounts), thus serving a (steadily) growing niche market that wants access to this solar asset class23. Even if returns were not competitive it is not an altruistic investment since the entire community benefits via reduced carbon emissions due to solar users reduced reliance on the grid. For organisations, firms and homeowners as well as solar developers Solar Mosaic makes a source of low interest capital available for their solar projects to get underway. Those who choose to buy receive instant credit with a low interest loan leading to savings from day 124. Those who choose to rent simply make their rooftop available for installation and are free of risk, ongoing transaction and O&M costs, also enjoy savings from day 1. The Solar Mosaic leasing model is different from other leasing models which generally seek to lock in long term PPA’s tied to utility rates as compensation. 22 Source: Wang, U., 13 Solar Startups to Watch in 2013, 9 January 2013,https://gigaom.com/2013/01/09/13-solar-startups-to-watch-in-2013/ 23 Wang, U., 13 Solar Startups to Watch in 2013,9 January2013, https://gigaom.com/2013/01/09/13-solar-startups-to-watch-in-2013/ 24 http://homesolar.joinmosaic.com/partners/
  19. 19. 19 2.3 First large scale success story One of Solar Mosaic’s definitive projects was the raising of a US$698,775 loan to fund the installation of 447kW worth of panels on the Wildwoods Convention Center in Wildwood, New Jersey. Having launched a number of successful smaller scale projects up until this point, mostly on schools and community centres, and under 114kW in size, Solar Mosaic had decided to scale up and attempt to raise much more substantial funds for a large scale project on the east coast of the United States. 2.3.1 Wildwoods Convention Center Some months prior to the development of the project the Governor of the state Chris Christie had “signed legislation to grow New Jersey’s solar industry”25 making this an ideal project to showcase the state’s commitment to renewable energy. The venue, the Wildwoods Convention Center in New Jersey, was opened in 2001 and is a modern, state-of-the-art, 260,000-square-foot facility located on the picturesque New Jersey shore and designed to hold conventions, trade shows, meetings, concerts and exhibits with a maximum capacity of 10,00026. Plans were that the centre would eventually host the installation of 447kW of panels, which would produce 550,000 kWh of electricity annually, enough for 24% of its energy needs. Figure 2-3 Wildwoods Convention Center NJ 25 Wildwood Convention Center unveils solar project, 25July 2012, Shore News Today,available at http://www.shorenewstoday.com/snt/news/index.php/wildwood-mainmenu/wildwood-leader/27771-convention-center-unveils-solar-project.html 26 http://www.wildwoodsnj.com/cc/
  20. 20. 20 Figure 2-4 Wildwoods Convention Center Solar Installation 2.3.2 Roll out The project was rolled out in three phases, with Mosaic involved in the final round, which went online in April 2013 and sought to raise almost US$700,00027. The securities on offer would mature in 114 months and subscribers would earn an annual return of 4.5%28. In total funds of over US$1.3m were raised and total of 1,700 panels were installed with Tioga Energy and EPC contractor Pro-Tech Energy Solutions involved29. 823 investors from 42 states subscribed to the project. Their returns consist of revenues from the sale of the output to the state of New Jersey, the New Jersey Sports and Exposition Authority and the Greater Wildwoods Tourism Development Authority, as well as proceeds from the sale of the Solar Renewable Energy Credits (national incentives) to Atlantic City Electric30. Due to the uniqueness of the funding approach and ambitious size of the project it received Solar Server’s July 2013 Solar Energy System of the Month award. The unique power of the crowd funding approach and its ability to democratize solar is illustrated in Solar Mosaic’s infographic below. 27 https://joinmosaic.com/blog/mosaic-launches-huge-project-its-going-take-crowd/ 28 Roseland, C., Solar EnergySystem of theMonth: Wildwoods ConventionCenter PVproject,July 2013, Solar Serveravailable at http://www.solarserver.com/solar-magazine/solar-energy-system-of-the-month/wildwoods-convention-center-pv-project.html 29 Wildwood Convention Center unveils solar project, 25July 2012, Shore News Today,available at http://www.shorenewstoday.com/snt/news/index.php/wildwood-mainmenu/wildwood-leader/27771-convention-center-unveils-solar-project.html 30 Roseland, C., Solar EnergySystem of theMonth: Wildwoods ConventionCenter PVproject,July 2013, Solar Serveravailable at http://www.solarserver.com/solar-magazine/solar-energy-system-of-the-month/wildwoods-convention-center-pv-project.html
  21. 21. 21 Figure 2-5 Solar Mosaic's Wildwood Convention Center31 2.4 Current Chinese business model With the ambitious targets for distributed solar in 2015 and beyond, as well as a national and various province specific financial incentives, the market is looking for a suitable commercial model to apply32. Distributed solar focused EPC (Energy Performance Contracting) is one of these and, with incentives designed to encourage energy self-sufficiency, is one that is starting to gain traction. EPC is similar a solar lease as described above. 2.4.1 Energy performance contracting Under an EPC arrangement a solar developer agrees to install a rooftop, ground mounted (or even building integrated PV) array on a host’s site. The developer takes care of financing, 31 Source: Solar Mosaic via Roseland, C., Solar Energy System of the Month: Wildwoods Convention Center PVproject, July 2013, Solar Server available at http://www.solarserver.com/solar-magazine/solar-energy-system-of-the-month/wildwoods-convention-center-pv-project.html 32 RooftopSolar Gets Tractionin China – DistributedGeneration, Residential,Commercial,Feed-In Tariffs, Incentives, June 2014, Chadbourne available at http://www.chadbourne.com/rooftop_solar_china_june2014_projectfinance/
  22. 22. 22 development and installation of the project as well as ongoing O&M expenses for the life of the project. In return the host, usually a commercial entity such as an airport, factory etc., agrees to a long term PPA with the developer, signing a contract obligating it to purchase all the power produced by the array for the life of the project—at a discounted rate to incentivise the host which often escalates along with the current utility rate. The developer essentially bears all the risk but maintains ownership allowing it to capture any national or provincial incentives. The host benefits from a discounted energy rate over the life of the project, which means positive cash flows from day 1 and importantly no initial investment. After the developer experiences payback (perhaps 6 to 7 years) and had sufficient return (ideally IRR >12%) ownership of the array reverts to the host which then enjoys grid independence with unfettered access to its own green energy supply for the rest of the life of the panels. The ownership flip happens after around 20 years in the US but can be sooner depending on the agreement between owner/developer and host. Similarities to US ownership flip model This kind of ownership ‘flip’ model is not uncommon in the US as a means for community solar gardens projects to get underway with long term benefits to both host and subscribers (although subscriber returns are usually much lower than 12%). The University Park Community Solar LLC and Greenbelt Community Solar LLC projects both have ownership flip options—the host Churches have the option to buy the panels outright before the PPA contract expires33. At expiration, the ownership flips to the Church anyway. 2.4.2 Recent Solar EPC projects in China 1. DuPont’s R&D Centre in Shanghai—in the second half of 2014, Yingli Green Energy Holding Company Limited signed an EPC contract to install a 210kW solar array on the rooftop of the DuPont China R&D Centre in Shanghai34. According to Dupont’s global business director Chuck Xu, “DuPont and Yingli Solar established this project to model how solar power can be most effectively utilized to meet the growing demand for clean and sustainable distributed solar energy”35. Thus Yingli and Dupont’s model project is 33 Coughlin, J., Grove, J., Irvine,L., Jacobs, J. F., Phillips, S. J., Sawyer, A., Wiedman,J., A Guideto Community SharedSolar:Utility, Private, and Nonprofit Project Development, National Renewable Energy Laboratory, 2012 available at http://www.nrel.gov/docs/fy12osti/54570.pdf 34 http://www.pvbuzz.com/press-releases/yingli-green-energy-supports-china-policy-expand-distributed-solar-generation/ 35 DuPont and Yingli Solar Collaborate onCleanEnergy,DuPont Case Study, January2015available at www.dupont.com
  23. 23. 23 not just an arms-length commercial transaction but a strategic collaboration intended to showcase both firm’s core competencies and highlight their commitment to the development of solar in China—in fact DuPont already has 13 other solar installations at other sites36. The PPA is a 25 year contract in which DuPont agrees to purchase all 202,000 kWh expected to be produced by the panels37 (presumably at a discount). The installation is financed, owned and managed by Yingli which expects pay back in approximately 6 years after which it enjoys free cash flows, after expenses, for the rest of the life of the project. The panels cover a rooftop space of 2,100 square meters and according to their case study produce the equivalent energy consumption of 670 Chinese households per month38. A video summary of the project is available at the website39. Figure 2-6 DuPont R&D Centre Shanghai Solar Installation 2. Turpan Jiaohe Airport in Xinjiang—In May 2014, a subsidiary of China Aviation Supplies Holding Company signed a contract with Xinjiang Airport Group to install distributed solar on the area consisting Turpan Jiaohe Airport in the China’s northwest Xinjiang province. The size of the array is 150kW which consists of 480 ground mounted and 120 roof mounted panels covering an area of 4,000 square metres40. The panels are expected to produce 182,500 kWh of electricity per year, which the airport will purchase under an 18 year PPA after which ownership flips to Xinjiang Airport Group41. China Aviation Supplies will design, implement, and maintain the project until 36 DuPont and Yingli Solar Collaborate onCleanEnergy,DuPont Case Study, January2015available at www.dupont.com 37 Yingli Green Energy Supports ChinaPolicyto Expand Distributed Solar Generation, 24November 2014,PVBuzz available at http://www.pvbuzz.com/press-releases/yingli-green-energy-supports-china-policy-expand-distributed-solar-generation/ 38 DuPont and Yingli Solar Collaborate onCleanEnergy,DuPont Case Study, January2015available at www.dupont.com 39 http://www.dupont.com/products-and-services/solar-photovoltaic-materials/media/videos/advanced-pv-technologies-from-dupont-and- yingli.html 40 China’s Turpan Airport Installs 150KWSolar Power System, 4 January 2015,ReneSolar, availablet at http://renesola.com/news/340.htm 41 China’s Turpan Airport Installs 150KWSolar Power System, 4 January 2015,ReneSolar, availablet at http://renesola.com/news/340.htm
  24. 24. 24 payback and sufficient return are received. At the end of the PPA the airport enjoys free, green, grid independent electricity with the panels expected to last another 7 years or so42. Figure 2-7 Turpan Airport Solar Installation 3. Midea Group factories in Shunde Guangdong—also in the latter half of 2014 China Southern Power Grid Co., Ltd received a low interest RMB250 million loan from the Agricultural Bank of China’s Guangdong branch to install a 32MW (32,000kW) solar installation on the factories owned by Midea Group in Shunde43. Midea is a leading consumer appliances and air conditioning systems manufacturer in China. This installation is slightly different to the two previous cases in that the local utility was the developer this time, however the transactional arrangement is the same—Midea Group agrees to purchase energy produced by the array paying China Southern, which owns the array and collects national production incentives, for the energy it produces. Proceeds from the incentives and the PPA service the loan and ongoing expenses associated with the project. After 25 years the ownership flips to Midea Group44. 42 RooftopSolar Gets Tractionin China – DistributedGeneration, Residential,Commercial,Feed-In Tariffs, Incentives, June 2014, Chadbourne available at http://www.chadbourne.com/rooftop_solar_china_june2014_projectfinance/ 43 http://global.ofweek.com/news/Southern-Power-Grid-gets-RMB-250-million-loans-for-distributed-solar-PV-project-19404 44 RooftopSolar Gets Tractionin China – DistributedGeneration, Residential,Commercial,Feed-In Tariffs, Incentives, June 2014, Chadbourne available at http://www.chadbourne.com/rooftop_solar_china_june2014_projectfinance/
  25. 25. 25 Figure 2-8 Midea Group Shunde Solar Array 2.4.3 Returns on EPC projects Typical EPC (solar service agreement/power purchase agreement) projects in the US tend to attract investors motivated more by environmental responsibility and a desire to see the development of the industry rather than financial returns which are typically low with payback occurring after ten years or more45. Additionally their economic feasibility largely depends, not on revenues from the sale of the power produced, but the capture of the 30% federal government tax credit, state subsidies, and the sale of renewable energy credits (REC’s and sREC’s) awarded with the output of every 1000kWh of clean energy output. Incentives in China have been designed so that the typical distributed scale (defined as less than 6MW46) project in China can reach an IRR of 12-17% and payback in less than 10 years, perhaps around six to seven. Additionally they are designed around a ‘self consumption model’ and thus encourage grid independence of large commercial and industrial entities, as well as schools, hospitals, and government buildings. The three Chinese EPC projects mentioned above were designed with this in mind. These projects seem to be financed either with private equity or low interest loans. 2.5 Proposal for China Considering the receptivity of the EPC model to project hosts (see above) and the willingness of developers to engage it, we propose combining the EPC model and Solar Mosaic’s crowdsourcing model to create a Chinese online investment platform, which redefines ‘the community’ to include ‘the crowd’ and leverages it as a source of capital. Using the platform, investors are presented with a series of small to medium scale distributed solar projects (perhaps 45 personal communicationwith JoyHughes, founder andCEO ofSolar Gardens Institute,10 November2014 46 “Guanyuzuohao fenbushi dianyuan bingwangfuwugongzuo de yijian neirong” (“Suggestion onthe service ofdistributedgeneration interconnection”),28 February2013, State Grid, available at http://www.sgcc. com.cn/ztzl/newzndw/cyfz/02/288813.shtml
  26. 26. 26 <1MW) located in areas ‘close’ to investors themselves. The community decides which projects to fund and individuals decide how much they would like to invest considering factors such as:  the project itself  the expected return  the expected payback period  the IRR etc. Once 100% (or close to) funding is pledged, the project is implemented and positive cash flows gained in the form of PPA revenue + national production incentives + state production/capacity incentives (if any). After expenses are deducted (O&M, insurance, regulatory costs, management fees etc.) after tax profit is distributed amongst investors as a dividend. Considering the average commercial electricity rate of 0.92rmb/kWh, and assuming this rises each year (with utility rates and inflation) + the national 0.42rmb/kWh incentive, with an initial investment of CNY10-12 per watt, investors could have their money back in around 8 years and enjoy an IRR of 12-17% over 20 years. The project is still communal in that any area that is visible, high profile, or easily accessible to the public so that investors recognise, know and can perhaps even visit, the project in which they are investing (e.g. an array at Baiyun airport funded by investors in Guangzhou) is usable. This is in keeping with the community solar gardens concept of local investors helping to develop locally owned and consumed solar. We reason that close proximity and visibility will encourage potential investors to take part—an array located at an airport that investors in Guangzhou are likely to have used will garner far more interest than an array at an airport in western China’s Xinjiang region. To incentivise the host who has to make the host site (e.g. a rooftop or unused land area) available for the length of the project and enter into a long term power purchase agreement, the solar electricity rate will be pegged to the utility rate with an agreed upon discount e.g. 10%. This way the host enjoys positive free cash flow from day 1. Furthermore, after payback and agreed upon IRR is reached by investors, the ownership of the array flips to the host which then enjoys unfettered access to the green energy it produces for the rest of the useful life of the array. The array can either be simply flipped to the host or sold. We anticipate that at the rate this
  27. 27. 27 technology is developing the array will be fully depreciated with little to no salvage value at this time. The SPE/HSP/third party is the entity responsible for commercialising the arrangement. It is the entity which facilitates the above process and is responsible for:  hosting the website  selecting the projects  partnering with developers to design, implement and maintain the projects  navigating the legal and regulatory environment  liaising with the site host and investors  designing the contract, collecting PPA revenues and distributing dividends  collecting any production or capacity based financial incentives owed to the project  maintaining expenses associated operations  generally ensuring the smooth running of the project over it’s lifetime In return for the above it either collects a percentage fee of revenues for its services OR is entitled to a share of the profit (e.g. as investors contribute capital, the third party brings expertise and project management to the table for which it may be entitled to 20% of the profits for example, with the remainder being split proportionally amongst investors). The third party is the legal owner of the project until the ownership flip occurs. Figure 2-9 Proposed EPC model for China Crowd SPE Distributed solar installa on e.g. JNU Management School roo op Host e.g. Jinan University Beijing Profit = ROI 0.42RMB/kWhCrowdfunded capital Installa on, O&M and ownership kWh PPA 90%*0.92RMB/kWh
  28. 28. 28 Why an online investment platform? Online investment platforms are not uncommon to Chinese investors who currently have a number of loan and fund based products to choose from, for example Alibaba’s Yu’e Bao, Renrendai, and Lilicai. Online platforms are the easiest and most convenient to use for the tech savvy online community. Investors are likely to demand ease-of-use, convenience, transparency and comparability. An online platform makes the most sense for this. Additionally it allows potentially any person or entity in China with an online bank account to participate thus opening up the market to include almost all of China. Why focus on small to medium scale independent EPC projects? In order to ‘test the waters’ pilot projects will initially be small to increase the likelihood that full funding is achieved, lower risk and gauge investor interest. Additionally small and medium scale projects are likely to produce insufficient output for the hosting entity to offset its entire utility bill. This ensures that 100% of the energy is being consumed onsite, ‘behind the meter’, which means the utility only plays a peripheral role. Removing a stakeholder as large, influential and potentially cumbersome as the state run utility ensures a smoother path to implementation. If larger projects are undertaken, perhaps from 2MW to 4MW in capacity, the array will most likely produce surplus power and which would have be to be sold back to the utility, entailing a number of regulatory, logistical and structural hurdles. What are the potential problems? Potential problems could fall into the below categories:  Market immaturity—the market may not be ready for this kind of business and investment model. Investing in solar backed assets is something relatively new to the Chinese market and therefore this could be met with suspicion. Chinese investors are risk averse so developing trust could be a big issue.  Returns are long term—the Chinese investment time horizon is short term. Payback periods of up to ten years may be too long for Chinese investors who generally want their
  29. 29. 29 money back as quickly as possible. Since the most attractive IRR is achieved only after 20 years, shortening the investment period to half that considerably drops the IRR to around 6-8%.  Logistic and project related—with little to no experience working with Chinese developers or hosts there are potentially a number of unaccounted for issues that could come up related to installation and implementation of a distributed solar array.  Political—we are unsure how a proposal like this would be received by the regulatory authorities as well as what and how much of a role traditional ‘relationship’ based business culture practices will play in getting something like this off the ground.
  30. 30. 30 3 China’s green energy industry development and policies Since opening up in 1978 China has achieved much in the proceeding three decades. Rapid development exemplified by a 10% average annual growth rate has seen 500 million47 48 people pulled out of poverty and an increase in life expectancy and life quality for Chinese citizens that could not have been dreamed of at the time of the first reform. Today China is the world’s most populous nation with approximately 1.4 billion people, the world’s second largest economy with a nominal GDP of CNY56,900 billion (US$9.4 trillion)49—although may have just passed the US to become the world’s first. It is the world’s largest manufacturer and exporter making it effectively the factory of the world; is the world’s largest creditor; boasts two of the word’s largest banks; has 61 companies in Fortune’s Global 500, has the “world’s second-largest highway network, the world’s 3 longest sea bridges, and 6 of the world’s 10 largest container ports”50; and is home to an enormous middle class with significant purchasing power making it an extremely lucrative consumer market. It goes without saying that China is a highly influential player on the world stage and wields significant geopolitical and economic power not only in Asia but globally, typified by its founding in 2015 of the Asian Infrastructure Investment Bank (AIIB) which a number of countries spanning Europe and Australasia have so far applied to be members of. 3.1 Environmental Consequences This rapid development however has come at considerable environmental cost. China recently exceeded the US to become the world’s largest annual emitter of carbon dioxide (even though it’s per capital emissions are relatively low). China’s emissions are forecast to continue to rise as its energy appetite increases, necessary to fuel its growth (despite GDP growth rate targets reduced to 7% at the recent 两会 National Communist Party meetings). 47 WorldBank andthe Development Research Center of the State Council,P. R. China. 2013. China2030: Buildinga Modern,Harmonious, and Creative Society. Washington, DC: WorldBank. DOI: 10.1596/978-0-8213-9545-5.License: Creative Commons AttributionCC BY 3.0. 48 Zhang, T., Ge, Y., & Zhao, R., Creating theChinese dream: A practitioner's guideto impact investingin China's greenSMEs.,2012, China Impact Fundavailable at http://www.ied.cn/sites/default/files/China%20Impact%20Investing%20Report_Compressed%20Final.pdf. 8-9 49 Eco-civilization: China’s Blueprint for a New Era—Interpreting outcomes from China’s latest leaders conference, February2014, Insight Briefing, TheClimate Group 50 WorldBank andthe Development ResearchCenter of the State Council,P. R. China. 2013. China2030: Buildinga Modern,Harmonious, and Creative Society. Washington, DC: WorldBank. DOI: 10.1596/978-0-8213-9545-5.License: Creative Commons AttributionCC BY 3.0.
  31. 31. 31 Figure 3-1 Emissions of carbon dioxide from energy, annually and cumulatively51 China is effectively the world’s largest polluter however air pollution is not the only problem— water contamination, food safety, and natural environment issues are all at the fore of public discourse and shape governmental policy today. China’s capital Beijing is swathed in thick smog for much of the year with visibility sometimes reduced to less than a few hundred metres, air purifiers are commonplace in many Chinese homes and face masks a necessity on some days in many Chinese cities. The pollution has economic consequences—flights are cancelled due to poor visibility; schools are closed and recommendations are made for sensitive groups such as elderly, children and sickly to stay indoors; pollution related illnesses, health problems and early death manifest themselves in otherwise productive individuals and result in direct and indirect costs via decreased overall productivity and increased health care costs. In their 2012 report China Impact Fund (CIF) and New Ventures China (NVC) estimated that the economic cost of environmental degradation rose from CNY511.8 billion to CNY970.11 billion in the five years from 2004 to 2009—consistently around 3% of GDP by their calculations52. Combined environmental and ecological degradation, as well as treatment costs were 8.7% of GDP in 200953. In a 2013 report, the World Bank puts the figure at 10% of GDP of which air pollution accounts for 6.5% or US$564 billion54. 51 Source: WorldBank andthe Development ResearchCenterof theStateCouncil, P. R. China.2013. China 2030:Building a Modern, Harmonious, and Creative Society.Washington,DC: WorldBank.DOI: 10.1596/978-0-8213-9545-5. License: Creative Commons Attribution CC BY 3.0. 52 Zhang, T., Ge, Y., & Zhao, R.. Creating theChinese dream: A practitioner's guideto impact investingin China's greenSMEs, 2012,China Impact FundandNewVentures China, available at http://www.ied.cn/sites/default/files/China%20Impact%20Investing%20Report_Compressed%20Final.pdf. 8-9 53 Zhang, T., Ge, Y., & Zhao, R.. Creating theChinese dream: A practitioner's guideto impact investingin China's greenSMEs, 2012,China Impact FundandNewVentures China, available at http://www.ied.cn/sites/default/files/China%20Impact%20Investing%20Report_Compressed%20Final.pdf. 8-9 54 WorldBank andthe Development ResearchCenter of the State Council,P. R. China. 2013. China2030: Buildinga Modern,Harmonious, and Creative Society. Washington, DC: WorldBank. DOI: 10.1596/978-0-8213-9545-5.License: Creative Commons AttributionCC BY 3.0.
  32. 32. 32 3.2 Coal Much of the air pollution comes from China’s use of coal for both power production and heavy industry. China’s appetite for coal is almost insatiable. Increasing steadily for thirteen years, China now consumes almost half of the world’s coal which goes to generating up to 80% of it’s power—compared to other countries China’s coal use is double the US and four times India’s55. Figure 3-2 China's installed electricity capacity by fuel 2012 (total 1,145GW)56 Figure 3-3 Direct carbon dioxide intensities of different Chinese industries (2007) 57 55 William Chandler, ChenShiping, Holly Gwin, Lin Ruosida, WangYanjia, China’s Future GenerationAssessingthe Maximum Potential for Renewable Power Sources in China to 2050,February2014Report, WFF andEntri 56 Source: FACTSGlobal Energy, IHSCera, ChineseRenewable Energy Industries Association 57 Source: WorldBank andthe Development ResearchCenterof theStateCouncil, P. R. China.2013. China 2030:Building a Modern, Harmonious, and Creative Society.Washington,DC: WorldBank.DOI: 10.1596/978-0-8213-9545-5. License: Creative Commons Attribution CC BY 3.0.
  33. 33. 33 WWF and Entri estimate that coal related deaths number about 75,000 per year in China58 (although a quick internet search will show that this is probably a highly conservative figure). Coal is bad because burning it generates particulate matter, PM. This consists of tiny particles 2.5 micrometres in diameter or less which enter the lungs when breathed in and eventually become the cause of respiratory problems like asthma, coughing and wheezing and even long term health problems such as cancer. The PM2.5 scale is what is used in China and around the world to measure air pollution. Beijing often records PM2.5 Air Quality Index (AQI) levels of over 300, even reaching as high as 700. For reference below is the PM2.5 AQI scale59. Figure 3-4 PM2.5 AQI scale60 3.3 Government response Despite the country’s exceedingly bad levels of pollution the Chinese government has implemented a number of enabling policies to combat it, in particular air pollution. Indeed the seven priority industries highlighted for development in the 12th Five Year Plan (2011-2015) were new energy including nuclear, wind and solar power; energy conservation and environmental protection; biotech; new materials (rare earths and high end semi conductors); new IT; high end equipment manufacturing; and clean energy vehicles61. The trickle down effect that the goals of the plan have had at the provincial and municipal levels has resulted in 58 William Chandler, ChenShiping, Holly Gwin, Lin Ruosida, WangYanjia, China’s Future GenerationAssessingthe Maximum Potential for Renewable Power Sources in China to 2050,February2014Report, WFF andEntri 59 http://aqicn.org/faq/2013-09-09/revised-pm25-aqi-breakpoints/ 60 Source: http://aqicn.org/faq/2013-09-09/revised-pm25-aqi-breakpoints/ 61 China’s 12th Five-year PlanOverview, March 2011,KPMGChina
  34. 34. 34 significant strides in combating pollution and ultimately climate change. From a 2013 report by China’s National Development and Reform Commission: “In 2012, CO2 emissions per unit of GDP fell 5.02 percent compared to 2011. By the end of 2012, the output of China’s energy saving and environmental protection industry exceeded 2.7 trillion yuan. China’s current capacity in hydropower, nuclear, solar, and wind power, and plantation areas all rank first in the world…”62 Even outside of China, the country is acknowledged as being at the forefront of renewable energy investment and adoption. Of the US$214 invested in renewable energy worldwide in 2013, China accounted for one quarter or US$56 billion—more than all of Europe combined at US$48 billion and the US at US$3663. This figure was up to US$89.5 billion at the end of 2014, a year in which total carbon emissions and domestic coal consumption actually fell for the first time in over a decade—a 2% dip in emissions and 2.9% drop in coal consumption on the previous year64 65. Figure 3-5 Global investment in renewable energy by region 2013 (US$billion)66 In a historic agreement with the US late last year, China pledged to get up to 20% of its energy from non-fossil fuel sources by 2030 (60 to 70% by 2050 according to informal sources67) while 62 China's Policies andActions for AddressingClimate Change,2013, TheNational Development andReformCommissionofThe People’s Republic of China 63 Frankfurt School-UNEP Centre/BNEF. 2014.Global Trends in Renewable Energy Investment 2014 available at http://www.fs-unep-centre.org (Frankfurt am Main) 64 http://www.bloomberg.com/news/articles/2015-03-13/china-s-carbon-emissions-drop-for-the-first-time-since-2001 65 although this didcorrespondtoa slower growth rate of7.4%, marginally missinggovernment targets of 7.5%,accordingto http://www.reuters.com/article/2015/01/20/us-china-economy-idUSKBN0KT04920150120 66 Source: Frankfurt School-UNEP Centre/BNEF. 2014. Global Trends in Renewable EnergyInvestment 2014 available at http://www.fs-unep- centre.org(Frankfurt am Main) 67 ZhongyingWang, Director ofChinaNational Renewable energyCentre andenergyResearchInstitute,NDRC as quotedin ‘Expert: China in 2050 the vast majority ofenergy consumption will come fromcleanenergy’,in ChinaNews Network, June 19,2013, http://finance.chinanews.com/ny/2013/06-19/4947323.shtml
  35. 35. 35 the US will cut emissions levels almost 30% below 2005 levels by 202568. The government is widely regarded as having some of the most encouraging renewable energy policies in the world and is far ahead in terms of installed capacity and total production as the graphic below illustrates. Recently the Chinese Academy of Sciences was ranked the top R&D institution in the world for renewable energy by KIC InnoEnergy and Questel Consulting of the European Institute for Innovation and Technology (EIT)69. Table 3-1 Energy mix of top countries for renewables in 201370 3.4 Solar power Solar will eventually play a significant role in the energy mix. The central government recognises its importance and has year on year extended it’s incremental capacity and overall installed capacity goals over the course of the 12th Five Year Plan. 68 Spross, Jeff., We Have A Deal: The U.S. AndChina Agree To Historic EmissionReductionTargets, 12 November2014, available at http://thinkprogress.org/climate/2014/11/12/3591284/us-china-climate-deal/ 69 Beckman, K.,ChineseAcademy of Sciences Is Top Academic R&D Player In SustainableEnergy,14 March2015, available at http://www.energypost.eu/meet-worlds-number-1-academic-player-sustainable-energy-chinese-academy- sciences/http://www.energypost.eu/meet-worlds-number-1-academic-player-sustainable-energy-chinese-academy-sciences/ 70 Source: REN21. 2014.Renewables 2014Global Status Report (Paris: REN21Secretariat)
  36. 36. 36 Figure 3-6 China Solar PV Installations to 2015 (GW)71 Total installed capacity by the end of 2015 is to be 35GW. This target is likely to be met at the current rate despite last year’s goals falling short—only 10GW of a 14GW goal was installed last year (8GW of which was to be distributed). Considering that current installed capacity is around 28.05GW of which 23.38GW is ground mounted (utility scale) and only 4.67GW distributed72 the target of 15GW for 2015 is ambitious and exciting. Most of this will have to be distributed scale though if the government is to reach its 15GW total installed capacity target by the end of the Plan (3.15GW of this will be rooftop)73. These targets along with favourable policy, incentives and practical measures (a nation wide production incentive of CNY0.42/kWh regardless of whether the electricity is consumed onsite of fed back into the grid, low cost financing options for distributed projects, monthly billing to help alleviate cash flow pressure for developers, and free permitting and grid interconnectivity74) create an environment for distributed solar that is not only financially lucrative for the right business model, but an opportunity for contributing to the alleviation of China’s air pollution crisis by taking strain off the largely coal fired grid, evening up the energy mix, and thus curtailing climate change. 71 Source: Hove, A., Cleantech AdvisoryManager, CAN CHINA DISTRIBUTED SOLAR REACH 20GWBY 2015?, 9 December2013, Azure International (Azure International analysis andgovernment targets) 72 Shaw, V., China: PVinstalled capacity grows to almost 30GWin 2014, 16February 2015,available at http://www.pv- magazine.com/news/details/beitrag/china--pv-installed-capacity-grows-to-almost-30-gw-in-2014_100018231/#ixzz3WsjHhbEl 73 Shaw, V. andHall, Max., Chinaunveils 15GWsolar target, 30January2015, PVMagazine available, at http://www.pv- magazine.com/news/details/beitrag/china-unveils-15-gw-solar-target_100018005/#axzz3T0suDQBJ 74 Hove, A., CleantechAdvisoryManager, CAN CHINA DISTRIBUTED SOLAR REACH 20GWBY 2015?, 9 December 2013, Azure International
  37. 37. 37 Section 2 4 Feasibility study 4.1 Purpose The purpose of this feasibility study is to explore whether the solar gardens business model could be adapted to suit China. The model should be in keeping with the basic solar gardens principles of distributed generation, community buy-in and openness to all, a return, and of course a net positive effect on the environment. In attempting to maintain these basic principles, the current distributed solar and crowd-funding environment in China will be examined to see how the original business model could evolve in order to take advantage of favourable renewable energy policies and incentives, in particular with regard to distributed solar generation. Additionally it will be important to explore how the currently hazy regulatory framework surrounding crowdfunding could be navigated. The question we ask is whether distributed solar EPC/PPA generation projects could be financed via equity-based crowdfunding in China. Furthermore it will be important to determine how this investment could be marketed (e.g. impact investment), what it would involve technically, as well as the potential return to investors. As far as we know a model like this has not been implemented anywhere yet in mainland China. This research was carried out in close collaboration with Joy Hughes of The Solar Gardens Institute in Colorado, United States. The Solar Gardens Institute (www.solargardens.org) is an institution devoted to the promotion of the solar gardens concept and community solar in general through education, training and consulting. Joy Hughes is its founder and CEO and has a strong interest in promoting the concept in China. Over the course of researching and writing this thesis I maintained frequent correspondence with her and also had the opportunity to meet with her in person as she visited China on a number of occasions. This paper aims to be a useful resource for anyone hoping to develop any kind of community solar model or project in China. Why crowdfunding? Numerous studies and reports highlight the potential for crowdfunding to tackle climate change by making funds available to small and medium sized businesses involved in renewable energy
  38. 38. 38 related projects and clean tech in general75 76 77 78. Crowdfunding connects the people with the business idea, directly to the people with the funds to make it happen, bypassing traditional financing options like banks and venture capitalists79. This form of funding not only cuts out the middleman but also democratizes the process i.e. it is the crowd itself which determines which business or project is worthy of being funded. Additionally, while the crowd at an individual level holds relatively meagre financial resources, as a whole it represents a significant source of capital—and in China, as we know, the crowd is huge. The savings deposit base in China is around CNY74.2 trillion80 and the World Bank values the crowdfunding market here at US$50 billion over the next ten years81. Clearly then there is an opportunity for an impact investment82 type product—like crowdfunded distributed solar—to gain a share of the pie. 75 Crowdfunding’s Potential for the Developing World, 2013,infoDev, Finance andPrivate Sector Development Department, Washington, DC: WorldBank 76 Tao Zhang, Christine Yip, Ge (Sophy)Wang, Qin (Iris) Zhang, ChinaCrowdfundingReport, October 2014,producedby the China Impact Fund of Dao Ventures 77 Vellinger, K., Redefiningimpact: case studies in transformative finance, January 2013,Tonic andTransformativeFinance Network 78 CrowdfundingandRenewable Energy: Couldit Revolutionize Large-ScaleRenewable Project Financing?, Energy PolicyInnovationCouncil 79 Tao Zhang, Christine Yip, Ge (Sophy)Wang, Qin (Iris) Zhang, ChinaCrowdfundingReport, October 2014,producedby the China Impact Fund of Dao Ventures 80 StratforGlobal Intelligence analysis, 3 March2014, available at https://stratfor.com/analysis/new-investment-platforms-raise-questions-chinas- banking-system 81 Crowdfunding’s Potential for the Developing World, 2013,infoDev, Finance andPrivate Sector Development Department, Washington, DC: WorldBank 82 “combiningforprofit incentives with social andenvironmental (SE) benefits”accordingto TaoZhang, Christine Yip,Ge (Sophy)Wang, Qin (Iris) Zhangin ChinaCrowdfundingReport, October 2014,producedby the China Impact Fundof Dao Ventures
  39. 39. 39 5 Market Analysis 5.1 Demographics There are no geographic boundaries. Leveraging the reach of the internet, potentially any person in China with access to the internet and an online bank account could form part of the market. In 2014 of a population of almost 1.4 billion people, 46%, or 641 million people, were internet users83. This penetration rate has been steadily rising each year. Regarding demographics, current draft regulations restrict the crowd to accredited investors who are high net worth individuals i.e. those worth CNY1 million in assets and an income of at least CNY300,000. This somewhat limits the demographics to individuals with high net incomes and by extension individuals likely to have had some tertiary education. It is important to note however that these are draft regulation (more detail below) and that currently nothing is stopping anyone with an online bank account from making investments in crowdfunding and P2P lending schemes. If we are to market this opportunity as an impact investment then the key demographic is likely to be young people, perhaps under 35 who are educated and employed with a reasonable income level and some savings. Behavioural factors are likely to be most important. In 2013, more than 250 million internet users used the internet for online banking (260 million used platforms like Alipay for online payments)84 and this figure is only likely to grow along with internet penetration rates. The typical online financial services user is likely to be young and tech savvy and prefers managing their money using their smartphone or hand held device rather than physically entering a branch. Furthermore the typical online investor is likely to be a young person with some savings he or she is keen to grow. We speculate that an investment in a crowdfunded distributed solar project—what is essentially a solar backed security—could be viewed in the eyes of the consumer as a substitute to a term deposit savings accounts or other long term low liquidity investment vehicle, but with much higher returns and relatively low risk. Chinese online investors are concerned with or characterised by the following: 83 http://www.internetlivestats.com/internet-users/china/ 84 http://www.statista.com/statistics/277352/online-activities-in-china-based-on-number-of-users/
  40. 40. 40  Reputation85—investors are more likely to use a mature platform with a good reputation, ideally one that is backed by a well-known company within the industry such as Alibaba, Jindong, or Tencent. This helps to ‘buy trust’, important in Chinese culture, and crucial to the success of the project or start-up. Lack of reputation and by extension trust is likely to prove the biggest competitive disadvantage when compared to incumbents.  Transferrable ownership rights86—investors tend to want a liquid investment. They want to be able to easily transfer their funds in and out of projects (and presumably between projects). This helps to reduce their risk. Indeed ‘demand deposit’ is a unique selling point of Alibaba’s Yu’e Bao 余额宝. This is easy for platforms with a large customer base but for smaller platforms it is difficult. Building up or inheriting (via partnership) as extensive a customer base as possible and implementing this feature will therefore be important.  Short time horizon87—investors prefer projects with a short time horizon, ideally no more than one year. The long time horizon associated with payback and ROI of distributed solar projects may be a hurdle for Chinese investors.  Small size88—investors prefer projects that are smaller in size, at least initially. Larger projects should be divided into a series of smaller rounds of funding i.e. instead of one CNY1 million round, three rounds of CNY333,000 could be offered89. Distributed solar projects require significant capital outlay—the main barrier actually holding many cash flow concerned entities from going solar in the first place. Separate but simultaneous rounds of funding may help to alleviate this issue.  Risk—Chinese are risk averse. McKinsey found that 70%90 of affluent91 Chinese say that they are “risk averse” and that “principal protection is their primary investment consideration” when it comes to personal financial services92. Many of the people I talked to seconded this view. Solar is a relatively low risk technology however. With few moving parts and favourable government policy for the next 20 years at least, all that is needed is for the sun to shine for the array to generate revenue. 85 Personal communicationwith founder of 理理财‘Lilicai’ onThursday5 February2015 86 Personal communicationwith founder of 理理财‘Lilicai’ onThursday5 February2015 87 Personal communicationwith founder of 理理财‘Lilicai’ onThursday5 February2015 88 Personal communicationwith founder of 理理财‘Lilicai’ onThursday5 February2015 89 Interestingly,accordingtothe founder ofLilicai,it seems Chinese investors are not overly concernedwith the kind ofproject they areinvesting as they lackanymeaningful methodof actuallymeasuringthe risk ofa project, orassessingthequality ofa loan. 90 In 2014 McKinsey andCompanyperformeda personal financial services surveyof 3,558 Chinese consumers across Tier 1,2, 3, and4 cities 91 Affluent segment are those whose pre-tax householdincomeexceeds RMB228,000; mass-affluent between RMB162,000andRMB228,000; upper mass between RMB88,000and162,000; lower mass between RMB53,000 andRMB88,000(McKinseyandCompany2014) 92 Kenny Lam, JaredShuandElaine Huang, Four Trends ShapingChina’s Retail BankingLandscape, January 2015,McKinsey& Company
  41. 41. 41  Preference for debt93—Chinese consumers would rather their principal be guaranteed than have an unlimited upside, and therefore prefer debt to equity based crowdfunding investments.  Personal financial planning—53% of Chinese consumers say that they have or are considering a long-term financial plan94.  Heavy usage—almost half of consumers are heavy users with an average of 4.5 to 6.0 banking products95.  Financial return—at the end of the day investors are most concerned about their financial return than any social or environmental benefit associated with the investment96. Figure 5-1 There are 3 main types of financial services consumers in China97 Key takeaways Any new investment product will be initially viewed with scepticism unless it leverages the reputation of a partnering entity. Therefore the most logical entry strategy is to partner with a reputable incumbent—this could be either a technically sophisticated platform like Alibaba or 93 Getty Goh (CEO of CoAssets.com), 3 Tips for Companies RaisingMore Than$1 Million onAsianCrowdfundingSites, 5 October 2014 available at http://www.crowdfundinsider.com/2014/10/51733-3-tips-companies-raising-1-million-asian-crowdfunding-sites/ 94 Kenny Lam, JaredShuandElaine Huang, Four Trends ShapingChina’s Retail BankingLandscape, January 2015,McKinsey& Company 95 Kenny Lam, JaredShuandElaine Huang, Four Trends ShapingChina’s Retail BankingLandscape, January 2015,McKinsey& Company 96 Zhang, T., Ge, Y., & Zhao, R. (2012), Creating theChinesedream: A practitioner's guide to impact investingin China's green SMEs, China Impact Fundavailable at http://www.ied.cn/sites/default/files/China%20Impact%20Investing%20Report_Compressed%20Final.pdf. 8-9. 97 Source: McKinsey Asia PFSsurvey (2014); team analysis
  42. 42. 42 Tencent which would co-develop a devoted distributed solar investment platform; or a popular and reputable Chinese crowdfunding site which would simply list the distributed solar project(s) to compete with other new start ups or projects seeking funding from the crowd. Market education will also be important. Since Chinese are risk averse and have relatively short investment time horizons, some effort will be required to convince them to invest in a product which has a long investment horizon (up to ten years for payback) and a lucrative return that is only realised after even longer. Furthermore, even though the technology is safe it is relatively unknown, as are the policies surrounding it. Much will need to be done marketing wise to ensure investors are as familiar with the technology as possible. Ultimately the selling point will be the attractiveness of the return. Policy and incentives have been designed so that an IRR of 12-17% over 20 years is feasible, even more if the power is sold to industrial users. This and the fact that it is a technology which is beneficial to the environment and reduces pollution, big concerns for young people today since it directly affects their current and future quality of life, should be sufficient to capture market share. Key questions  How can we build trust and reputation?  How can we attract investors to such long-term projects?  How can we facilitate information flow to reassure investors their money is safe? 5.2 Market needs Chinese people like to save. Chinese banks have an estimated CNY74.2 trillion98 in savings cash deposits. Savers lack investment options for their funds due to China’s centrally controlled interest rates—around 3% on bank deposits—which would do little more than account for inflation. The stock market is opaque and too risky for the average Chinese saver. Generally there is a lack of transparent, understandable and accessible investment options within China. 98 StratforGlobal Intelligence analysis, 3 March2014, available at https://stratfor.com/analysis/new-investment-platforms-raise-questions-chinas- banking-system
  43. 43. 43 As internet penetration deepens, Chinese consumers become increasingly wealthy and the average Chinese citizen gets more and more comfortable using online services, demand for more innovative financial products, in particular investment options, will increase. Platforms such as Alibaba’s Yu’e Bao 余额宝 are therefore gaining in popularity. Technically a mutual fund, it has many of the characteristics of a checking account—‘demand deposit’ making it a highly liquid investment, no minimum deposit making it relatively low risk, an attractive interest rate of up to 6% variable, and it is easy to use and convenient. The fund itself is managed by Tianhong Asset Management Co. which is 51% owned by Alibaba99. It is the largest money market fund in China (one of the largest in the world), and since launching in June 2013 has collected an estimated CNY600 billion in assets with over 100 million users. Other major online mutual fund based investment platforms with similar features include Tencent’s LiCaiTong which is a mutual fund run by China Asset Management, offers returns of up to 8%, is accessible via Tencent’s ubiquitous social messaging service WeChat; JD.com’s XiaoJinKu; and Baidu’s Baifa. All offer substantially better yields than big four bank savings accounts. Figure 5-2 Yield comparison: Yu'e Bao vs. Li Cai Tong vs. Chinese banks100 99 StratforGlobal Intelligence analysis, 3 March2014, available at https://stratfor.com/analysis/new-investment-platforms-raise-questions-chinas- banking-system 100 Source: WindInfo Reorient,TheWall Street Journal
  44. 44. 44 5.3 Crowdfunding These aren’t the only online products on offer. In a July 2014 report, McKinsey101 highlights other business models that are disrupting the financial services landscape in China:  P2P lending—peer-to-peer lending platforms, which facilitate a kind of ‘debt-based crowdsourcing’102. For a fee, lenders are connected with high quality borrowers who are guaranteed principal and a competitive fixed interest rate return. LiliCai is one example, along with CreditEase 宜信103, Lufax陆金所104, Paipaidai 拍拍袋105 and Renrendai 人人 贷106. These P2P products appear to be mostly short-term loans (less than 12 months), with various risk levels, sizes (micro loans to large commercial projects in the tens of millions of RMB), and annualized returns of 6-14%. According to McKinsey107 in 2013 total loans outstanding amounted to CNY14 billion.  Crowdfunding—usually equity based, an online platform carefully selects projects and solicits investments from the general public to fund the project’s development. If sufficient funds are raised the project is initiated. Investors have rights to a proportionate share of the project’s profits as ROI. Alternatively return may come in the form of non- monetary rewards or simply be donation based. Notable platforms include Angelcrunch.com108, Dajiatou.com109, Yuanshihui110, Alibaba’s YuLe Bao (7% ROI)111, JD.com’s platform Coufenzi JD Finance112; as well as Zhongchou.cn, Demohour.com, and Dreamore.cn, which are rewards based. A recent World Bank report values the crowdfunding market in China at USD50 billion over the next ten years113. 101 McKinsey & Company, China’s digital transformation:The Internet’s impact onproductivityandgrowth, July 2014, McKinseyGlobal Institute 102 Drake, D., Top4 CrowdfundingDevelopments and Predictions forAsia in 2015, 8 January 2015 available at http://www.entrepreneur.com/article/241389 103 http://www.creditease.com/ 104 http://www.lufax.com/ 105 http://www.ppdai.com/ 106 http://www.renrendai.com/ 107 McKinsey & Company, China’s digital transformation:The Internet’s impact onproductivityandgrowth, July 2014, McKinseyGlobal Institute 108 http://angelcrunch.com/ 109 http://www.dajiatou.com/ 110 http://www.yuanshihui.com/ 111 http://www.crowdfundinsider.com/2014/04/35063-alibaba-enters-crowdfunding-arena-new-entertainment-financing-play/ 112 http://z.jd.com/index.html 113 Crowdfunding’s Potential for the Developing World, 2013,infoDev, Finance andPrivate Sector Development Department, Washington, DC: WorldBank

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