Investor-specific Cost of Capital and Renewable Energy Investment Decisions
ISBN
978-1-78326-776-7
Type
book section
Date Issued
2015
Author(s)
Editor(s)
Donovan, Charles W.
Abstract
Introduction - Incumbents versus new investors in the renewable energy sector
The diffusion of renewables in Germany and other European countries has fundamentally changed the energy investor landscape. For several decades, investment in power generation infrastructure in Germany was largely dominated by four utility incumbents, often termed the ‘Big Four', which controlled 76% of the conventional generation capacities in 2012. In the emerging renewable energy segment, however, 90% of German wind power capacity and 96% of distributed solar capacity was owned by non-utilities in 2012. Private investors, such as homeowners, farmers and cooperatives, account for 47% of German renewable energy capacity. Moreover, institutional investors, such as pension and investment funds and insurance companies, play a significant role in financing renewables and own 42% of installed capacities.
We propose that differences in the cost of capital among Investor groups, common techniques of investment valuation, along with the financial characteristics of renewable and fossil technologies, explain the aforementioned shift in investment behavior. More specifically, we conjecture that electric utilities have traditionally invested in highrisk/high-return power generation projects, implying high costs of capital. Using the same metrics to assess lower-risk/lower-return projects in the field of renewables, such as wind parks or PV projects
with guaranteed feed-in tariffs, has led to a systematic underestimation
of their attractiveness, resulting in a loss of market share of utilities vis-à-vis other investors with lower cost of capital.
The diffusion of renewables in Germany and other European countries has fundamentally changed the energy investor landscape. For several decades, investment in power generation infrastructure in Germany was largely dominated by four utility incumbents, often termed the ‘Big Four', which controlled 76% of the conventional generation capacities in 2012. In the emerging renewable energy segment, however, 90% of German wind power capacity and 96% of distributed solar capacity was owned by non-utilities in 2012. Private investors, such as homeowners, farmers and cooperatives, account for 47% of German renewable energy capacity. Moreover, institutional investors, such as pension and investment funds and insurance companies, play a significant role in financing renewables and own 42% of installed capacities.
We propose that differences in the cost of capital among Investor groups, common techniques of investment valuation, along with the financial characteristics of renewable and fossil technologies, explain the aforementioned shift in investment behavior. More specifically, we conjecture that electric utilities have traditionally invested in highrisk/high-return power generation projects, implying high costs of capital. Using the same metrics to assess lower-risk/lower-return projects in the field of renewables, such as wind parks or PV projects
with guaranteed feed-in tariffs, has led to a systematic underestimation
of their attractiveness, resulting in a loss of market share of utilities vis-à-vis other investors with lower cost of capital.
Language
English
Keywords
renewable energy
finance
utilities
investment decision
HSG Classification
contribution to scientific community
Refereed
No
Book title
Renewable Energy Finance - Powering the Future
Publisher
Imperial College Press
Publisher place
London
Start page
77
End page
101
Pages
25
Subject(s)
Eprints ID
242607