Fuel mix characteristics and expected stock returns of European power companies
AbstractThis 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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Bibliographic InfoPaper provided by University of Duisburg-Essen, Chair for Management Science and Energy Economics in its series EWL Working Papers with number 11056.
Length: 32 pages
Date of creation: Oct 2011
Date of revision: Oct 2011
power plant investments; asset pricing; fuel mix diversification;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-22 (All new papers)
- NEP-CIS-2011-10-22 (Confederation of Independent States)
- NEP-ENE-2011-10-22 (Energy Economics)
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