IDEAS home Printed from https://ideas.repec.org/a/sae/enejou/v47y2026i3p41-62.html

Target Leverage and Cost of Capital in the Electricity Sector: Implications for Valuation and Public Policy

Author

Listed:
  • Eduardo Kazuo Kayo

Abstract

This paper examines the factors that influence the target capital structure of electricity firms and proposes a protocol for estimating and applying target leverage in the sector. The target capital structure is crucial to the weighted average cost of capital (WACC), which impacts firm valuation, capital budgeting, and regulatory policies, thereby balancing investor returns with consumer tariffs. While prior energy finance literature has focused on the cost of equity, capital structure has often been overlooked. I aim to address this gap by introducing a protocol for estimating target leverage, relevant for calculating regulatory WACC and firm-level valuations. Although my focus is on the Brazilian electricity market, the methodology can be applied internationally. I find that electricity firms tend to align their leverage with a target level, and I discuss the implications of my protocol for regulatory WACC and corporate valuation. JEL Classification : G31, Capital Budgeting; Fixed Investment and Inventory Studies; Capacity; G32, Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill; G38, Corporate Finance and Governance: Government Policy and Regulation

Suggested Citation

  • Eduardo Kazuo Kayo, 2026. "Target Leverage and Cost of Capital in the Electricity Sector: Implications for Valuation and Public Policy," The Energy Journal, , vol. 47(3), pages 41-62, May.
    • Handle: RePEc:sae:enejou:v:47:y:2026:i:3:p:41-62
    DOI: 10.1177/01956574261425733
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/01956574261425733
    Download Restriction: no
    File URL: https://libkey.io/10.1177/01956574261425733?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jacek Barburski & Artur Hołda, 2023. "Determinants of the Corporate Financing Structure in the Energy and Mining Sectors; A Comparative Analysis Based on the Example of Selected EU Countries for 2012–2020," Energies, MDPI, vol. 16(12), pages 1-29, June.
    2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    3. Acharya, Viral V. & Almeida, Heitor & Campello, Murillo, 2007. "Is cash negative debt? A hedging perspective on corporate financial policies," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 515-554, October.
    4. Jagannathan, Ravi & Matsa, David A. & Meier, Iwan & Tarhan, Vefa, 2016. "Why do firms use high discount rates?," Journal of Financial Economics, Elsevier, vol. 120(3), pages 445-463.
    5. Steffen, Bjarne, 2018. "The importance of project finance for renewable energy projects," Energy Economics, Elsevier, vol. 69(C), pages 280-294.
    6. Heitor Almeida & Chang‐Soo Kim & Hwanki Brian Kim, 2015. "Internal Capital Markets in Business Groups: Evidence from the Asian Financial Crisis," Journal of Finance, American Finance Association, vol. 70(6), pages 2539-2586, December.
    7. Philipp Krüger & Augustin Landier & David Thesmar, 2015. "The WACC Fallacy: The Real Effects of Using a Unique Discount Rate," Journal of Finance, American Finance Association, vol. 70(3), pages 1253-1285, June.
    8. Simshauser, Paul, 2023. "On dividend policy and market valuations of Australia’s listed electricity utilities: Regulated vs. merchant," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 696-715.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Naiwei Chen & Meiya Chang, 2013. "Financial Crisis and Corporate Liquidity: Implications for Emerging Markets," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 20(1), pages 1-30, March.
    2. Zaheer Anwer & Shamsher Mohamad & Wajahat Azmi & Akram Shavkatovich Hasanov, 2022. "Product market fluidity and religious constraints: evidence from the US market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1761-1817, April.
    3. Jiang, Jie & Hou, Jack & Wang, Cangyu & Liu, HaiYue, 2021. "COVID-19 impact on firm investment—Evidence from Chinese publicly listed firms," Journal of Asian Economics, Elsevier, vol. 75(C).
    4. Almaghrabi, Khadija S., 2023. "Non‐operating risk and cash holdings: Evidence from pension risk," Journal of Banking & Finance, Elsevier, vol. 152(C).
    5. Fan, Chenguang & Bae, Seongho & Liu, Yu, 2024. "Can FinTech transform corporate liquidity? Evidence from China," Innovation and Green Development, Elsevier, vol. 3(2).
    6. Enkhtaivan, Bolortuya & Davaadorj, Zagdbazar, 2021. "Do they recall their past? CEOs’ liquidity policies across firms as they switch jobs," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    7. Annalisa Ferrando & Klaas Mulier, 2015. "Firms’ Financing Constraints: Do Perceptions Match the Actual Situation?," The Economic and Social Review, Economic and Social Studies, vol. 46(1), pages 87-117.
    8. Quoc Trung Tran, 2020. "Corporate cash holdings and financial crisis: new evidence from an emerging market," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 10(2), pages 271-285, June.
    9. Pan Xu & Jun He & Daojuan Wang & Sofia A. Johan & Siwei Lin, 2024. "Could the simultaneous persistence of greater cash holdings and interest‐bearing debts affect stock price crash risk?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 3226-3262, July.
    10. Ducret, Romain, 2021. "Investors' perception of business group membership during an economic crisis : Evidence from the COVID-19 pandemic," FSES Working Papers 524, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    11. Matthew Hill & Kathleen Fuller & G. Kelly & Jim Washam, 2014. "Corporate cash holdings and political connections," Review of Quantitative Finance and Accounting, Springer, vol. 42(1), pages 123-142, January.
    12. Iskandar-Datta, Mai E. & Jia, Yonghong, 2012. "Cross-country analysis of secular cash trends," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 898-912.
    13. Dudley, Evan & Zhang, Ning, 2016. "Trust and corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 363-387.
    14. Amess, Kevin & Banerji, Sanjay & Lampousis, Athanasios, 2015. "Corporate cash holdings: Causes and consequences," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 421-433.
    15. Liu, Qigui & Luo, Tianpei & Tian, Gary Gang, 2015. "Family control and corporate cash holdings: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 31(C), pages 220-245.
    16. Moritzen, Mark Raun & Schandlbauer, Alexander, 2020. "The impact of competition and time-to-finance on corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 65(C).
    17. Honda, Tomohito, 2023. "The effects of credit lines on cash holdings and capital investment: Evidence from Japan," Journal of the Japanese and International Economies, Elsevier, vol. 67(C).
    18. Efraim Benmelech & Nitish Kumar & Raghuram Rajan, 2024. "The Decline of Secured Debt," Journal of Finance, American Finance Association, vol. 79(1), pages 35-93, February.
    19. Brown, James R. & Petersen, Bruce C., 2011. "Cash holdings and R&D smoothing," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 694-709, June.
    20. Gohdes, Nicholas, 2025. "On spot revenues, capital structure and trade off theory: Analysing investment risk for contracted renewables," Energy Economics, Elsevier, vol. 148(C).

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:enejou:v:47:y:2026:i:3:p:41-62. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.