The Obstacles to the Growth of the Renewable Energy Industry in the European Union

Abstract

The study presents a comparative analysis of the financial standing of renewable- and conventional-energy-generating companies domiciled in the European Union, and explores factors contributing to their operating performance and financing needs. The comparative analysis of electricity-generating companies demonstrates that renewable energy providers have steadily improved their financial standing and appear well-prepared to compete with conventional energy generation from fossil fuels. Relying on univariate statistical tests, we demonstrate that, at present, renewable energy companies generate a significantly higher return on assets and make larger investment outlays than their conventional peers. Univariate cross-sectional tests confirm that they also enjoy access to cheaper equity and more plentiful debt financing thanks to a shift in the priorities of financial institutions and capital markets. We posit that, besides the cumbersome permit system, the biggest challenge to the operating performance of renewable energy firms could reside in the restrictive revenue caps, price regulation, and renewable firms’ exposure to spot market price fluctuations. The econometric analysis based on multivariate panel regression models demonstrates that the profitability and financing needs of renewable energy companies are more sensitive to electricity prices than those of conventional energy firms. We conclude that higher energy prices and greater reliance on market pricing mechanisms could significantly boost the performance of the renewable energy sector.