Figuring what’s fair: The cost of equity capital for renewable energy in emerging markets

Figuring what’s fair: The cost of equity capital for renewable energy in emerging markets

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Article ID: iaor201111745
Volume: 40
Issue: 12
Start Page Number: 49
End Page Number: 58
Publication Date: Jan 2012
Journal: Energy Policy
Authors: ,
Keywords: energy, risk
Abstract:

The appropriate cost of capital for a renewable energy project depends upon an accurate measure of investment risk. Employing the conceptual framework of a commonly accepted asset pricing model, we analyze the risk faced by renewable energy investors in large emerging markets. We find that firms in Brazil, China and India expose multinational investors to the same risk as investing in emerging markets generally. The risk to domestic investors in those same firms ranges from substantially below‐average to above‐average, depending upon the country. The results are robust across several model versions and statistical techniques. With an eye toward government efforts to encourage the deployment of renewable energy in developing countries, we establish a range of estimates for the required return on equity capital in this fast‐growing and politically important economic sector.

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