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Fuel mix characteristics and expected stock returns of European power companies

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  • Malte Sunderkötter

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    (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen)

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    Abstract

    This article investigates the impact of the fuel mix structure in power generation portfolios on expected stock returns for major European power companies. The 22 biggest publicly listed European power producers are examined between January 2005 and December 2010. Based on the capital asset pricing model (CAPM) and multiâ€factor market models, the systematic risk of the power companies relative to the overall market performance and other typical energy and macroeconomic risk factors is analyzed. The fullâ€information approach is used to determine technologyâ€specific betas and risk factor sensitivities from the sample. Although most companies are not exclusively in the power producing business, it is shown that the generation fuel mix has a significant impact on the historical stock returns of the investigated companies. In particular, the sample companies exhibit significant differences in the systematic risk of gas and nuclear generation technologies compared with renewable technologies measured by technologyâ€specific, delevered beta factors. This study extends existing literature and contributes new insights in two ways: Firstly, this is to our knowledge the first empirical analysis comparing the financial risk of different electricity generation technologies. Secondly, the results provide practical benefit to determine adequate riskadjusted capital costs for typical generation technologies. Therewith, this study is relevant for evaluating all kinds of power plant investments.

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    File URL: http://www.wiwi.uni-due.de/fileadmin/fileupload/BWL-ENERGIE/Arbeitspapiere/RePEc/pdf/wp1106_Fuel_mix_characteristics_and_expected_stock_returns_12Oct11_MS_EWL_workingpaper.pdf
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    Bibliographic Info

    Paper provided by University of Duisburg-Essen, Chair for Management Science and Energy Economics in its series EWL Working Papers with number 11056.

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    Length: 32 pages
    Date of creation: Oct 2011
    Date of revision: Oct 2011
    Handle: RePEc:dui:wpaper:1106

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    Keywords: power plant investments; asset pricing; fuel mix diversification;

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    1. ZOETTL, Gregor, 2008. "On investment decisions in liberalized electricity markets: the impact of price caps at the spot market," CORE Discussion Papers 2008037, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    3. Leahy, John V & Whited, Toni M, 1996. "The Effect of Uncertainty on Investment: Some Stylized Facts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 64-83, February.
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    6. M. Martin Boyer & Didier Filion, 2004. "Common and Fundamental Factors in Stock Returns of Canadian Oil and Gas Companies," CIRANO Working Papers 2004s-62, CIRANO.
    7. Bower, Dorothy H & Bower, Richard S & Logue, Dennis E, 1984. " Arbitrage Pricing Theory and Utility Stock Returns," Journal of Finance, American Finance Association, vol. 39(4), pages 1041-54, September.
    8. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
    9. Sadorsky, Perry, 2001. "Risk factors in stock returns of Canadian oil and gas companies," Energy Economics, Elsevier, vol. 23(1), pages 17-28, January.
    10. Roques, Fabien A. & Newbery, David M. & Nuttall, William J., 2008. "Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach," Energy Economics, Elsevier, vol. 30(4), pages 1831-1849, July.
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