Modelling Profitability and Exposure to Risk in Renewable Energy Industry

Abstract

Reputed as living in the era of fossil-fueled economies, due to their low cost, fossil fuels are deemed the main energy source. Fossil fuels emissions are the main causes of global warming and climate change, while the demand and consumption of energy is constantly increasing. On the other hand, there are limited resources to meet the ever-increasing needs. Thus, it is necessary to carry out related studies in this field, in order to find alternative sources in order to provide energy for future generations and to end the age of fossil fuels. Therefore, there is a sparking interest in renewable energy in order to reduce the negative effects on the environment and to create sustainable development. The question raised is how profitable, and what risks renewable energy companies face? The aim of this study is to identify the factors that influence the profitability of renewable energy companies and exposure to risk for the biggest energy companies that operate in European Union countries. For this purpose, three different estimation methods are used. The study uses a sample of 43 Renewable Energy companies in the European Union extracted from DataStream over the period 2004-2020. For the static model, the Ordinary Least Square (OLS) and Random Effects method to define factors that shape Renewable Energy (RE) companies’ performance is employed. In addition, due to the existence of endogeneity in OLS estimator, the results of profitability in terms of ROAA and Tobin’s q are presented by using the two-steps dynamic system GMM (Generalized Method of Moments) that deals with endogeneity issues. The findings show that market capitalization is crucial to enhance profitability. iv Leverage has a significant positive effect on firm’s profitability measured by ROAA, and Tobin’s q. Capital intensity has a negative effect on short-term profitability (ROAA). Moreover, the effect of support schemes shows that firms under the Feed-in Tariffs perform better than Tradeable Green Certificates (TGC) in terms of ROAA, while the opposite is in terms of Tobin’s q. This is the first comprehensive study that sheds light on determinants for this sector by investigating the effect of firms-specific, industry specific, macroeconomic factors and the effect of remuneration that is solely dedicated to Renewable Energy companies. Short-term and long-term profitability of RE companies is important for practitioners related to demand for energy, and to create strategies that becomes those firms profitable. A study on renewable energy companies that produce clean energy improve human development and consequently economic growth is crucial for sustainable development.