Examining risk and return profiles of renewable energy investment in developing countries: The Case of the Philippines

Phoebe Saculsan and Takashi Kanamura

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the risk and return profiles of energy companies with renewable energy (RE) investment in developing countries taking the Philippines as our country case study. First, we analyze the impact of the global RE project specific risk and country risk on RE projects using a simple capital asset pricing model (CAPM) by benchmarking stock returns of these companies to either the global S&P (S&PGCE) index or to the local Philippine Stocks Exchange (PSE) index. Our findings show that on short- and mid- to long term investment interval, a “pure” RE company, the Energy Development Corporation (EDC), is affected by both these risks examined, while those with partial investment in renewables are affected only on the short-term. Next, we calculated these companies’ abnormal returns by using the Jensen’s alpha. Results show that EDC's alpha values are positive on all short- and medium-to-long term investments and on both indices, suggesting that Philippine RE companies are possibly underestimated on both the global RE market and the Philippine stock market. Lastly, we examined the latest Feed-in Tariff (FIT) level by using the beta results of EDC and the FIT structure of solar PV. Results show that the FIT rate generates profit to both the global and local RE companies’ risk and returns from the investors’ perspective, but is higher than the desired FIT rate from the policymakers’ perspective. This paper aids in investment decision-making by showing that differences in investment timeframes and RE shares could impact investment outcomes in developing countries.

Keywords: renewable energy investment; capital asset pricing model (CAPM); developing countries; Philippines (search for similar items in EconPapers)
JEL-codes: G12 G15 Q20 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-cfn, nep-ene, nep-fmk and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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