Property rights and the financing of renewable energy technologies – How Consumer Stock Ownership Plans contribute to the Energy Transition

This paper proposes a contractual solution to the problem of financing decentralised renewable energy production. The reorganisation of energy production, esp. the transition from fossil to renewable energy sources (“Energy Transition”) is currently acknowledged as a permanent and evolving process. Recognized as one of the main problems in this transition is enabling finance mechanisms that would cover these renewable energy projects in an uncertain and oligopolistic market. This raises the question of whether citizen’s co-ownership in RES that emerged over the past 25 years in some countries is a transitory phenomenon or a condition for the “Energy Transition” and if the latter is the case, how to further develop financial participation mechanisms in the RES sector. Our analysis is based on the theories of property rights, transaction costs and incomplete contracts, which provide a rationale for decentralised energy production. According to standard literature, the traditional market for energy production based on fossils, which generally requires great sums of capital, has allocated property rights in the form of very large organisations, which benefit from economies of scale and are efficiently recouping this capital. That is, large organisations have formed through vertical integration based on transaction costs efficiency and second-best investment incentives. Thus, it is assumed that these technologies are and will be the most economically efficient. However, this interpretation of the energy market assumes that the development of technology is independent from the allocation of property rights. To improve this standard view and to account for the path dependency of organisations becoming inefficient under changed circumstances and the inability of potentially competitive forms of organisation to emerge it is necessary to include technology as an endogenous factor. Consequently, technology runs a two-way causality with property rights. That is, if new forms of property rights are to be enabled (i.e., ownership and control of decentralised production) this would, in turn, enable alternative forms of technology (i.e., renewables). Key to facilitate this reallocation of property rights is the design of new finance contracts. We use the example of the “Consumer Stock Ownership Plan” (CSOP) as the necessary contract providing a financing mechanism. We focus on wind and photovoltaic power which have two pronounced structural differences to fossils: (1) they depend on weather and thus are volatile in their power production scheme and (2) they have a marginal cost of production close to zero. CSOPs enable consumers of energy utilities without savings or access to capital credit to acquire productive property, i.e., renewable energy plants while at the same time creating a system of incentives for asset formation. Responding to supply flexibility they tap the potential for demand-side flexibility facilitating smart grids. We analyse how CSOPs can contribute to financing renewable technologies and what particular advantages their dispersed ownership structure has. As a result we show the economic viability of CSOPs contributing to the reorganisation of energy production. * This working paper prepared for the 2nd WINIR Conference on Sept. 2015 in Rio de Janeiro, Brazil, is the result of a collaborative effort involving apart from the presenting authors Özgür Yildiz.