Electricity Generation Technologies Systematic Risk

Abstract

We propose a method to estimate differentiated costs of equity for electricity generation technologies. We provide evidence that there is a substantial difference in their cost of equity. This method is based on a regression between available information on electric utilities equity return and their electricity generation asset portfolio. Our first main finding is that there is a statistically significant risk premium for nuclear technology. This point is in line with the most recent studies using a higher discount rate for nuclear technology compared to coal fired plants. But, in contrast with these studies, we find that the value of the risk premium is on the order of 1% above the systematic risk of a coal-fired plant, which is considerably lower than their recommended value of 3%. The robustness of this result is tested for the structural breaks that may have been induced by the August, 2008 financial crisis and the Daishi-Fukushima accident of March, 2011. Our second finding deals with renewable energies. Despite the existence of subsidies through feed-in tariffs which would make them look like safe investments, they present a high level of systematic risk. A possible explanation for this important excess return is the fact that they are dependent on subsidies for their development and thus, bear a larger systematic exposure than can be seen on short term time series data.