A few month ago I was starting to look a bit closer to the world of Fintech with the aim to identify new digital financing platforms providing access to finance for smart city projects, especially for small and mid-sized cities.
Over the time it became more clear that there is no easy solution available. What was clear from the beginning is that such solutions could only be applied to a certain kind of projects, namely energy efficiency / deep retrofitting and renewable energy projects, as they deliver a more or less predictable revenue stream from energy savings or produced energy. And this revenue streams are in principle suited to allow re-financing of upfront project investments.
While this might nevertheless look rather straightforward, digger even slightly deeper into smart city projects, how they are structured and resulting specific requirements, a lot of complexity becomes visible even without looking at the "pure" (re-)financing part.
Complexity of smart city projects
There is a lot of information available about smart city project challenges, solutions, structure etc and you can find relevant information, guidelines and reports at the EU Smart City Marketplace. Therefore I am just highlighting some key steps to give a perspective where digital financing platforms become relevant.
- Foundation: Cities need to have a smart city strategy and plan
- Start: Some first project development and public procurement is needed (sometimes even on the level of Pre-Commercial-Procurement PCP)
- Project implementation, e.g. via an ESCO
- Re-financing of ESCO - the moment the digital financing platform appears
In reality, financing needs to be considered early upfront in the process to ensure you have a bankable project at the end, but for the purpose of this article, I am not elaborating further in this. If you are interested in getting a feeling what planning means, here is a good article from Steven Fawkes.
Examples of digital financing platforms
I have to admit that this headline is slightly misleading as in reality there is not a single platform in operation - to my knowledge - which provides something similar to Jack Ma's 3 minute loan to smart city project financing. However, following my previous post, I have received a lot of feedback by mail or through long video conference exchanges. Currently I have structured them into three groups:
- Project Platforms
This might look a bit strange and their is likely a better way of structuring it, but it has helped my thinking so I am using it here as well.
There are already some fintech companies providing a similar service than Jack Ma's 3-minute loan, loans up to 300.000 USD an SME can get within a few hours purely using an online service. But this are company loans and not energy efficiency financing by forfaiting. Examples are
- Ondeck, US: loan service for SME, access to finance within a day
- Forward Financing, US: working capital for SME, access to finance within hours, up to USD 300k
- Kabbage, US: credit lines up to USD 150k within minutes (own claim). Owner: American Express!
Well, blockchain always comes with a lot of buzz and it not always easy to distinguish between what really works (or can work) and what is just a nice paper. I have listed just 2. Both a in very early stage and I have not yet figured out completely myself how this will work.. or if it will work at all.
- EFFORCE: A lot of big buzz including a celebrity as a door opener, Apple co-founder Steve Wozniak. in principle they cover everything. After implementation of an energy efficiency project, energy consumption is tracked with smart meters delivering data to a smart contract for initiating payments. Projects get bundled and tokenized and everybody can buy such tokens (cryptocurrency WOZX) and benefit from regular returns. Tokens can also be traded on some crypo exchanges providing a secondary market and finally liquidity. Well, even if this all works, a lot of complexity obviously remains, see above steps 1-3.
- CommonsHood: A blockchan based wallet app to provide communities with instruments for financial inclusions. Covers topics such as access right tokens, crowdfunding or group buying. I have added it here as the crowd financing options miht in principle be able to provide financing for some smart city projects although that's clearly not the focus of this solution.
Likely not a good name as this covers a broad range of projects and business in early phase all with different background and objectives. And they usually do not provide financing themselves but support the bankability of projects and/or help in getting access to finance. The list is clearly not complete but hopefully a good overview and starting point.
- TrustEE: Likely the most advanced platforms starting with some software supported project evaluation features up to a linked Special Purpose Vehicle (SPV) directly providing finance. Focus is more on industrial projects but in principle also applicable for smart cities projects.
- EEnvest: risk evaluation tool for energy efficiency investments in buildings
- eQuad: bridging platform for projects and investors
- ESI: project structure model platform including insurance (and using blockchain)
- SOURCE: software enabled project structuring and implementation platform, financed by regional development banks
- Optimised Retrofit: project delivering a procurement framework but also trainings, focus housing
No silver bullet.
Clearly financing cannot be seen in isolation and a 3-minute financing solution might not be available overnight if ever. Interesting to see that some platforms develop further starting to include more of the elements otherwise tackled separately by the different project platforms, e.g. TrustEE starts including green taxonomy and insurance solutions.
Blockchain can be an enabler as it offers a number of options for automisation bringing administrative costs down such as automatic transfer of data via smart meters to smart contracts sitting on blockchain initiating payments (sounds like EFFORCE, right?), but there are still many open questions such as data security and standards on oracle/smart contract level. Tokenization is a key feature of blockchain/DLT and can bring costs down and deliver liquidity. But cryptocurrencies are not yet as normal as fiat money.
SOURCE offers a very professional solution for cities and as it is software enabled and its processed are standardised. And standards were and will remain a key driver of accelerating investment flows into energy efficiency and also broader infrastructure related smart city projects.
On the 15th of June at 4pm CET during the Covenant of Mayors Investment Forum, I will act as a panelist in my role as Co-Chair of the of the Action Cluster Business Model & Finance of the Smart City Marketplace. Another panelist will be Steven Fawkes (I references sometimes to him in this blog and he also directed me to some solutions). So in case you are interested to discuss this topic further, please feel free to register
On the agenda, you will also see a number of referenced platforms presenting themselves in more depth: ESI, TrustEE.
On the 10th of June at 4pm CET, during the general assembly of the EU Smart City Markeplace, Georg Vogt from empirica will present the project proCURE with a number of cities implementing a pre-commercial-procurement for deep retrofit.
If you are a supplier, that's likely quite interesting, please register here
For any other question, remark, comment - just drop me a mail
About Jürgen Ritzek
Juergen Ritzek is co-founder and Business Director of EEIP. Juergen is responsible for strategy, marketing and business development of EEIP and drives the growth of EEIP towards an energy transition platform. Juergen leads EEIPs B2B communication and relations and ensures EEIP relevance for value chain challenges (inter-company) and internal decision-making processes (intra-company). Following an international career at Unilever he founded European network consultancy GBC (2009) and EEIP (2011).