OverviewAlbert Einstein once said: “If you always do what you always did, you will always get what you always got”. Theinvestment patterns of many traditional electrical utilities in Switzerland show that their investment managersapparently supported this position. Did these utilities really receive what they expected?It is a standard assumption in energy economics that electric utilities invest in projects which promise a higherinternal rate of return (IRR) than the firm’s weighted average cost of capital (WACC). Since energy companies tendto have a higher cost of capital than institutional or private investors, their expected IRR is also high, which, at leastin the past, led to continued preference for larger and riskier projects, such as gas or coal-fired power plans, ratherthan renewable energy projects, such as solar or wind (Helms et al., 2015; Ondraczek, Komendantova, & Patt,2015). This paper aims to find out whether such preference to stick to the status quo payed off for Swiss utilities byinvestigating the performance of realised projects in Switzerland and abroad. Twelve fossil and renewable energyinvestment projects of Swiss utilities in Switzerland, Germany, Italy, France and Bulgaria implemented between2004 and 2014 serve as case studies for the analysis.The paper is organised as follows. First, the method is explained in more detail: the process of choosing projects forthe analysis, the process of collecting input variables for calculating IRR for these projects, and the approach toestimating missing data points. Second, the WACC of the selected companies is compared to the rates of return ofthe analysed projects. These results are explained with reference to key variables that affected the performance ofthe power plants: demand and corresponding load hours; wholesale electricity prices; currency exchange rates;policies that caused either higher revenues through feed-in tariffs and certificates or lower revenues through changesin regulation. The results are relevant for understanding the role of market, currency and policy risks for corporatedecisions about investments in new energy projects.MethodsTo explore the gap between expected and actual risk-adjusted returns of fossil vs renewable energy investments, theresearch employs a cross-case study analysis of 12 specific investment projects conducted by Swiss utilities in theperiod 2004-2014. The expected IRR is calculated based on the data collected from the media announcements at thetime of the project launch, such as, for instance, expected production amounts. The realized IRR of these projects iscalculated based on the real data about project performance, the missing variables are estimated based on the generalmarket data. The calculations for the remaining years of the project implementation are based on the averageperformance of the project to date and market conditions of the last year. This means, that, for instance, the amountof policy support or electricity prices are assumed to be the same as in the last year, while the production amountsare estimated at average. The derived IRR is then compared to the WACC of the companies that conducted theseprojects.ResultsExpected returns on most of the analysed projects were significantly higher than the WACC of the respectivecompanies. The exception to this were two wind projects in Germany where expected returns were lower thanWACC of the company, and the company still implemented the project because of very low risk with the guaranteedlow feed-in tariff.Realized returns corresponded to expected ones only in Switzerland. In the rest of the cases, realized returns werelower than expected ones and often lower than WACC. Reasons for mismatch between expected and realizedreturns in case of wind energy: overestimation of weather conditions for wind energy in all cases exceptSwitzerland; policy changes (in case of Bulgaria – retroactive). Reasons for mismatch between expected andrealized returns for gas projects: overestimation of demand, disregard of wholesale prices trends. Note: annual reports describe market conditions as difficult before, during and after implementation of the projects, butinvestment strategy stays mostly the same.The results show lower realised rates of return for fossil fuel projects, while the patterns of renewable energy plantsperformance vary across countries. Market, currency and policy risk all play a role in explaining the gap betweenexpected and realised returns of the analysed projects. However, the lack of changes in investment strategy despitethe knowledge about market conditions seems to be the most important factor creating mismatches betweenexpectations and reality.ConclusionsDoing what was always done does not seem to have brought about the expected results in the case of Swiss utilitiesin recent years. The high cost of capital and corresponding expectations with regard to the IRR of new projects arebased on expectations formed by market conditions which have changed. Both renewable and fossil fuel powerprojects are affected by a number of risks. While large fossil power plant projects suffer from a significant decreasein demand, renewable energy projects are subject to a number of risks related to policy changes. Failing to updateinvestment strategies and sticking to the status quo under changing market conditions may lead to inferior financialperformance.The paper has important implications for research in energy economics, as most energy economic models workeither with expected future returns or with realized past returns, while systematic comparisons between one and theother could yield important insights about possible biases in investor behaviour, and hence induce learning processesto improve future investments.The paper might also have policy implications. While Swiss utilities mainly invest in projects with high return/highrisk profile, two cases of wind investments in Germany show that low risk projects may be attractive even for suchcompanies with high WACC. Stable support policies (as feed-in tariff for wind in Germany) may reduce the riskand respective return expectations, thereby attracting investors to renewable energy sector at lower cost. Policies thatoffer high returns (as quota system in Italy), but do not allow to precisely calculate those returns, may increase riskexpectations and minimum return requirements. This can increase the policy cost. Finally, attractive, but unstablepolicies (as in the case of feed-in tariff in Bulgaria) may attract only a limited number of investors.
展开▼
