Fuel mix characteristics and expected stock returns of European power companies

This article investigates the impact of the fuel mix structure in power generation portfolios on expected stock returns for major European power companies. The 22 biggest publicly listed European power producers are examined between January 2005 and December 2010. Based on the capital asset pricing model (CAPM) and multi-factor market models, the systematic risk of the power companies relative to the overall market performance and other typical energy and macroeconomic risk factors is analyzed. The full-information approach is used to determine technology-specific betas and risk factor sensitivities from the sample. Although most companies are not exclusively in the power producing business, it is shown that the generation fuel mix has a significant impact on the historical stock returns of the investigated companies. In particular, the sample companies exhibit significant differences in the systematic risk of gas and nuclear generation technologies compared with renewable technologies measured by technology-specific, delevered beta factors. This study extends existing literature and contributes new insights in two ways: Firstly, this is to our knowledge the first empirical analysis comparing the financial risk of different electricity generation technologies. Secondly, the results provide practical benefit to determine adequate riskadjusted capital costs for typical generation technologies. Therewith, this study is relevant for evaluating all kinds of power plant investments.