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Renewable Energy and Utility Profits: A Clear Path to Financial Success?

, by Andrea Costa
How renewable investments are reshaping the profitability and risk for European energy companies

As Europe works towards carbon neutrality by 2050, utility companies are investing heavily in renewable energy. But are these investments delivering financial returns? A new study published in “Energy policy” and titled “Production of Energy from Renewable Sources and Financial Performance of European Utilities,” by Susanna Dorigoni of the GREEN research center at Bocconi and Giuseppe A. Anzalone, sheds light on this question. Their findings show that renewable energy boosts profitability and market valuation but doesn't significantly reduce financial risk.

How the study was conducted

Dorigoni and Anzalone’s research draws on data from 64 European utilities over a decade, from 2011 to 2020, looking at how their investment in renewable energy impacted financial performance. The analysis focused on ROA (to measure profitability), Tobin’s q (to assess market valuation), and Weighted Average Cost of Capital, or WACC (as an indicator of risk). This multi-faceted approach helped clarify how renewables affect different aspects of a company’s financial health.

Profits and market valuations rise despite risks 

The study finds that investing in renewable energy improves both profitability and market value: utilities that invested more in renewables saw higher Return on Assets (ROA), meaning that these investments were effective at generating profits. According to the authors, “renewables, supported by incentive schemes and lower marginal costs, maintain a high level of profitability”.

Market valuation, measured by Tobin’s q, also showed a positive correlation with renewable energy. Investors view renewable-heavy firms as more valuable, reflecting the growing market interest in companies that are positioned for the green energy transition. “The positive relationship between renewable energy and Tobin's q suggests that investors consider renewables-based firms as more enticing investment opportunities,” the authors explain.

However, the study finds that renewable investments do not significantly reduce a company’s cost of capital. WACC, which measures the cost of financing, remained largely unaffected by the share of renewables in a utility’s energy mix. This finding points to a lingering perception of risk in financing renewable projects, despite their profitability. As Susanna Dorigoni notes, “While renewables improve financial performance, they do not lower perceived risks, which could limit further growth”. 

The study emphasizes that renewables can offer long-term value, particularly as they operate with lower marginal costs and benefit from government incentives like feed-in tariffs. This makes renewable energy an attractive option, especially as fossil fuel prices remain volatile.

However, the authors also caution that renewable energy still carries financial risks, especially when it comes to large-scale capital investments. The unchanged WACC suggests that, despite their profitability, renewable projects are still seen as risky by investors and lenders, which could slow down the pace of new projects.

Renewables are profitable, but financing challenges remain

Dorigoni and Anzalone’s study therefore suggests that renewable energy investments are profitable for European utilities, enhancing both their earnings and their market valuation. However, the perceived risk of these investments, as reflected in the cost of capital, remains a challenge. This poses a potential obstacle to future growth, as companies might find it harder to secure affordable financing for large-scale renewable projects. As Susanna Dorigoni notes, “the fact that utilities producing electricity from renewable sources do not have a privileged access to capital conflicts with the need for huge investments necessary to achieve the carbon neutrality envisaged by the European policy maker by 2050.”

Policymakers should then strive to create more supportive financial mechanisms that can reduce the perceived risks of renewable energy investments. While the shift to green energy is already financially rewarding, its full potential will be realized when the cost of capital drops, allowing utilities to expand their investments in renewable energy even further.