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Examining risk and return profiles of renewable energy investment in developing countries: The Case of the Philippines

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  • Saculsan, Phoebe
  • Kanamura, Takashi

Abstract

This paper examines the risk and return profiles of energy companies with renewable energy (RE) investment in developing countries taking the Philippines as our country case study. First, we analyze the impact of the global RE project specific risk and country risk on RE projects using a simple capital asset pricing model (CAPM) by benchmarking stock returns of these companies to either the global S&P (S&PGCE) index or to the local Philippine Stocks Exchange (PSE) index. Our findings show that on short- and mid- to long term investment interval, a “pure” RE company, the Energy Development Corporation (EDC), is affected by both these risks examined, while those with partial investment in renewables are affected only on the short-term. Next, we calculated these companies’ abnormal returns by using the Jensen’s alpha. Results show that EDC's alpha values are positive on all short- and medium-to-long term investments and on both indices, suggesting that Philippine RE companies are possibly underestimated on both the global RE market and the Philippine stock market. Lastly, we examined the latest Feed-in Tariff (FIT) level by using the beta results of EDC and the FIT structure of solar PV. Results show that the FIT rate generates profit to both the global and local RE companies’ risk and returns from the investors’ perspective, but is higher than the desired FIT rate from the policymakers’ perspective. This paper aids in investment decision-making by showing that differences in investment timeframes and RE shares could impact investment outcomes in developing countries.

Suggested Citation

  • Saculsan, Phoebe & Kanamura, Takashi, 2019. "Examining risk and return profiles of renewable energy investment in developing countries: The Case of the Philippines," MPRA Paper 97473, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:97473
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    File URL: https://mpra.ub.uni-muenchen.de/97473/2/MPRA_paper_97473.pdf
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    References listed on IDEAS

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    1. Asma Mobarek & A. Sabur Mollah, 2005. "The General Determinants of Share Returns: An Empirical Investigation on the Dhaka Stock Exchange," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 8(04), pages 593-612.
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    Cited by:

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    2. Raga M. Elzaki, 2023. "Impact of Financial Development Shocks on Renewable Energy Consumption in Saudi Arabia," Sustainability, MDPI, vol. 15(22), pages 1-23, November.

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    More about this item

    Keywords

    renewable energy investment; capital asset pricing model (CAPM); developing countries; Philippines;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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