Title: Valuation of renewable energy investments: an explanatory mixed-methods study about applied approaches amongst practitioners
Authors: Christian Hürlimann; Jasim Al-Ali; Dolores S. Bengoa
Addresses: The Business School, University of Gloucestershire, The Park, Cheltenham, GL50 2RH, UK ' The Business School, University of Gloucestershire, The Park, Cheltenham, GL50 2RH, UK ' University of Applied Management Studies, Neckarauer Str. 200, 68163 Mannheim, Germany
Abstract: The purpose of this explanatory, sequential, mixed-methods study is to learn about the applied valuation processes for renewable energy investments to explore key value drivers, best practice approaches and improvements amongst Swiss and German investment professionals. The results demonstrate that both systematic and unsystematic risks are relevant. Risk preferences and subsequently valuation are clearly influenced by experienced materialisation of risk. Discounted cash flow (DCF)-based valuation is state of the art in this valuation, while encountered risks are adjusted either in the cash flows or in the applied discount rate. The internal rate of return (IRR) approach is most frequently applied, predominantly within a simplified flow to equity (FTE) valuation approach. Market participants surprisingly still use the weighted average cost of capital (WACC) of the investing company, mostly as a basis for defining hurdle rates. For assessing investments' value protection abilities and performing impairment tests, the less known but more consistent DCF-based certainty equivalent (CE) and adjusted present value (APV) approaches could be introduced.
Keywords: capital budgeting; cost of capital; risk assessment; risk mitigation; non-traded assets; private equity; renewable energy; practitioners; Switzerland; Germany.
Global Business and Economics Review, 2020 Vol.22 No.1/2, pp.71 - 114
Received: 28 Feb 2018
Accepted: 24 Jul 2018
Published online: 06 Feb 2020 *