|dc.description.abstract||This thesis examines the risk factors affecting the returns of European energy utilities. Since 1996, European energy utilities have been impacted by changing commodity dynamics and European Union (EU) -induced policy challenges, including liberalisation and environmental objectives, which are materially affecting financial return. The EU’s drive to create a single European energy market and the ‘greening’ of energy supply have been described as the world’s most extensive cross-border reforms of energy networks and operating structure. Commentators suggest that these changes have resulted in a €500 billion loss in market value. Thus, understanding the risk factors and impact of policy on the financial return and valuation of European energy utilities is of utmost importance. This thesis represents the most comprehensive analysis of these changes to date, employing a sample of 88 energy utilities and 54 regulatory changes between 1996 and 2013. The thesis examines how returns are impacted by: 1) stock market and commodity risk premia, 2) the time-varying nature of the risk premia and 3) liberalisation and decarbonisation objectives on the sector.
More specifically, Chapter 4 develops an asset pricing model which is superior at explaining variation in energy utility returns compared with existing specifications. An inter-sectoral analysis shows that energy utilities’ returns are distinct to other sectors, including the oil & gas sector. The results also show inter-temporal variability in parameters. Chapter 5 addresses existing criticisms of asset pricing models, making adaptations to overcome poor performance at the sector level. The chapter also implements deductive and inductive structural break point tests, identifying significant break points in parameters and better isolates the unsystematic, firm-specific component of returns. Chapter 6 utilises the comprehensive asset pricing model developed in Chapter 5 to implement an event study approach surrounding key stages of the ordinary legislative procedure, examining the timing of market reaction and information incorporation. Further, Chapter 6 also explores how returns are impacted by four major policy streams, namely: Internal Energy Market, Energy Efficiency, Renewable Energies and Security of Supply streams.
The findings are multiple and appeal to academics and policy-makers alike. The results show that energy utilities are increasingly exposed to market and commodity risk factors through time, with standard finance risk factors having a greater impact than commodities. The results also show previously undocumented heterogeneous return profiles across different utilities, subject to significant structural breaks. Overall, the Internal Energy Market and Energy Efficiency streams have a cross-sectional negative impact on energy sector returns and at an early stage of the legislative procedure, thereby affect the sectors’ ability to raise the estimated €2.2 trillion investment capital needed to transition to a ‘smart’, decarbonised energy system. The Renewable Energies and Security of Supply streams have a limited impact on sector returns.||