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The Impact of Liberalization and Environmental Policy on the Financial Returns of European Energy Utilities

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  • Daniel J. Tulloch, Ivan Diaz-Rainey, and I.M. Premachandra

Abstract

European energy utilities face a range of policy induced challenges that are materially affecting their financial returns. Accordingly, in this paper we examine the impact of liberalization, energy efficiency, renewable energy, and security of supply legislation on European energy utilities' returns between 1996 and 2013. We implement an event study portfolio analysis using a comprehensive list of major regulatory changes, the largest utility sample to date, and a novel asset pricing model that controls for sector-level stock-market, term premium, and commodity risk factors. The results show EU policies that focus on liberalization and energy efficiency have a significant negative impact on the energy sector's financial returns. This reflects changes in the fundamental risk-reward trade-off of European energy utilities and investors' recognition of the economic impact of EU legislations on the sector. Contrary to assertions by the financial press, renewable energy objectives have no significant impact on returns at sector-level; the impact is mostly concentrated on the natural gas utilities. Our results highlight a tension between liberalization and environmental objectives, negatively impacting the sector's ability to raise the estimated $2.2 trillion investment capital needed to ensure reliable and increasingly environmentally-friendly energy supply.

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  • Daniel J. Tulloch, Ivan Diaz-Rainey, and I.M. Premachandra, 2017. "The Impact of Liberalization and Environmental Policy on the Financial Returns of European Energy Utilities," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    • Handle: RePEc:aen:journl:ej38-2-tulloch
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    1. Daniel J. Tulloch & Ivan Diaz-Rainey & I.M Premachandra, 2018. "The impact of regulatory change on EU energy utility returns: the three liberalization packages," Applied Economics, Taylor & Francis Journals, vol. 50(9), pages 957-972, February.
    2. Diaz-Rainey, Ivan & Tulloch, Daniel J. & Ahmed, Iftekhar & McCarten, Matthew & Taghizadeh-Hesary, Farhad, 2021. "An Energy Policy for ASEAN? Lessons from the EU Experience on Energy Integration, Security, and Decarbonization," ADBI Working Papers 1217, Asian Development Bank Institute.
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    5. Nguyen, Quyen & Diaz-Rainey, Ivan & Kuruppuarachchi, Duminda, 2021. "Predicting corporate carbon footprints for climate finance risk analyses: A machine learning approach," Energy Economics, Elsevier, vol. 95(C).
    6. Hickey, Conor & O'Brien, John & Caldecott, Ben & McInerney, Celine & Ó Gallachóir, Brian, 2021. "Can European electric utilities manage asset impairments arising from net zero carbon targets?," Journal of Corporate Finance, Elsevier, vol. 70(C).
    7. Düsterhöft, Maximilian & Schiemann, Frank & Walther, Thomas, 2023. "Let’s talk about risk! Stock market effects of risk disclosure for European energy utilities," Energy Economics, Elsevier, vol. 125(C).
    8. Friedemann Polzin & Mark Sanders & Bjarne Steffen & Florian Egli & Tobias S. Schmidt & Panagiotis Karkatsoulis & Panagiotis Fragkos & Leonidas Paroussos, 2021. "The effect of differentiating costs of capital by country and technology on the European energy transition," Climatic Change, Springer, vol. 167(1), pages 1-21, July.
    9. Vlad-Cosmin Bulai & Alexandra Horobet & Oana Cristina Popovici & Lucian Belascu & Sofia Adriana Dumitrescu, 2021. "A VaR-Based Methodology for Assessing Carbon Price Risk across European Union Economic Sectors," Energies, MDPI, vol. 14(24), pages 1-21, December.
    10. Diaz-Rainey, Ivan & Sise, Greg, 2018. "Green Energy Finance in Australia and New Zealand," ADBI Working Papers 840, Asian Development Bank Institute.
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