Renewable energy growth and the financial performance of electric utilities: A panel data study

Abstract Electric utilities are under pressure to increase clean energy production. Although the adoption of renewable energy can improve the utilities' environmental performance, a fundamental question is if it also pays in economic terms. Building on the natural-resource-based view of the firm, we answer this question using two data analysis methods. First, we carry out a regression analysis of panel data from 66 large electric utilities covering the period 2005–2014, applying both a fixed and random effects estimator. Subsequently, we use the Granger causality test to explore possible causality links. Our results show a negative correlation at the firm level between renewable energy increase and short-term as well as long-term financial performance. More specifically, we find that an increase in renewable energy penetration Granger-causes a reduction of long-term performance. However, the results also show that a firm's carbon intensity moderates the relationship. When the focus is on the country level, we find that an increase in renewable power penetration is also negatively correlated to long-term firm performance, which might be explained by the combined effect of low power demand and overcapacity in developed economies. We conclude that the concept of organizational ambidexterity may supplement the natural-resource-based view of the firm for a better understanding of the relationship between an increase in renewable power and a firm's profitability.

[1]  V. Lauber,et al.  Assessing the performance of renewable electricity support instruments , 2012 .

[2]  J. McGuire,et al.  Corporate Social Responsibility and Firm Financial Performance , 1988 .

[3]  F. Schmidt,et al.  Corporate Social and Financial Performance: A Meta-Analysis , 2003 .

[4]  Mario Richter.  Utilities’ business models for renewable energy: A review , 2012 .

[5]  Seung-Kyu Rhee,et al.  The measurement of corporate environmental performance and its application to the analysis of efficiency in oil industry , 2001 .

[6]  Stuart L. Hart,et al.  Do Corporate Global Environmental Standards Create or Destroy Market Value , 2000 .

[7]  L. Hassel,et al.  The value relevance of environmental performance , 2005 .

[8]  Silvia Kreibiehl.  Global Trends in Renewable Energy Investment 2015 , 2015 .

[9]  Peter M. Clarkson,et al.  Does it Really Pay to Be Green? Determinants and Consequences of Proactive Environmental Strategies , 2006 .

[10]  David L. Levy.  The environmental practices and performance of transnational corporations , 1995 .

[11]  Ken G. Smith,et al.  The interplay between exploration and exploitation. , 2006 .

[12]  G. Christainsen,et al.  ENVIRONMENTAL REGULATIONS AND PRODUCTIVITY GROWTH , 1981 .

[13]  Noan Walley,et al.  It's not easy being green , 1994 .

[14]  Samuel B. Graves,et al.  The corporate social performance-financial performance link , 1997 .

[15]  James J. Cordeiro,et al.  Environmental proactivism and firm performance: evidence from security analyst earnings forecasts , 1997 .

[16]  Darren Jones,et al.  An international review of the implications of regulatory and electricity market structures on the emergence of grid scale electricity storage , 2014 .

[17]  Kjetil Telle,et al.  “It Pays to be Green” – A Premature Conclusion? , 2006 .

[18]  N. Stoeckl.  The private costs and benefits of environmental self-regulation: which firms have most to gain? , 2004 .

[19]  I. García‐Sánchez,et al.  Climate Change and Financial Performance in Times of Crisis , 2014 .

[20]  E. Lindenberg,et al.  Tobin's q Ratio and Industrial Organization , 1981 .

[21]  Greg Filbeck,et al.  The Relationship between the Environmental and Financial Performance of Public Utilities , 2004 .

[22]  S. Hart.  A Natural-Resource-Based View of the Firm , 1995 .

[23]  Donald O. Neubaum,et al.  The Effects of Ownership , 2007 .

[24]  A. Stefan,et al.  Does It Pay to Be Green? A Systematic Overview , 2008 .

[25]  Rob Bauer,et al.  The Economic Value of Corporate Eco‐Efficiency , 2006 .

[26]  Shameek Konar,et al.  Does the Market Value Environmental Performance? , 2001, Review of Economics and Statistics.

[27]  Forest L. Reinhardt,et al.  Market Failure and the Environmental Policies of Firms: Economic Rationales for “Beyond Compliance” Behavior , 1999 .

[28]  Sara A. Morris.  ENVIRONMENTAL POLLUTION AND COMPETITIVE ADVANTAGE: AN EXPLORATORY STUDY OF U.S. INDUSTRIAL-GOODS MANUFACTURERS. , 1997 .

[29]  Shawn L. Berman,et al.  Does Stakeholder Orientation Matter? The Relationship Between Stakeholder Management Models and Firm Financial Performance , 1999 .

[30]  D. Paton,et al.  The impact of environmental performance on firm performance: static and dynamic panel data evidence , 2005 .

[31]  Robert S. Dooley,et al.  Are Conglomerates Less Environmentally Responsible? An Empirical Examination of Diversification Strategy and Subsidiary Pollution in the U.S. Chemical Industry , 1999 .

[32]  P. Allison.  Fixed Effects Regression Models , 2009 .

[33]  Lubomír Lízal,et al.  Effects of ownership and financial performance on corporate environmental performance , 2006 .

[34]  Sarah Golden,et al.  Corporate environmental disclosures: are they useful in determining environmental performance? , 2001 .

[35]  Katsuhiko Kokubu,et al.  Why Does the Reduction of Greenhouse Gas Emissions Enhance Firm Value? The Case of Japanese Manufacturing Firms , 2012 .

[36]  J. March.  Exploration and exploitation in organizational learning , 1991, STUDI ORGANIZZATIVI.

[37]  Michael E. Porter,et al.  Green and Competitive : Ending the Stalemate , 1996 .

[38]  R. Bacon,et al.  Global electric power reform, privatization and liberalization of the electric power industry in developing countries , 2001 .

[39]  Steven Li,et al.  Do greenhouse gas emissions affect financial performance? – an empirical examination of Australian public firms. , 2014 .

[40]  S. Waddock,et al.  Corporate Responsibility and Financial Performance: The Role of Intangible Resources , 2010 .

[41]  Stuart L. Hart,et al.  DOES IT PAY TO BE GREEN? AN EMPIRICAL EXAMINATION OF THE RELATIONSHIP BETWEEN EMISSION REDUCTION AND FIRM PERFORMANCE , 1996 .

[42]  Jean-Louis Coatrieux,et al.  A look at . . . , 2008, IEEE Engineering in Medicine and Biology Magazine.

[43]  A. Jantunen,et al.  Competitive and responsible? The relationship between corporate social and financial performance in the energy sector , 2014 .

[44]  Vilja Varho,et al.  Transition to distributed energy generation in Finland: Prospects and barriers , 2015 .

[45]  Naomi S. Soderstrom,et al.  Measuring corporate environmental performance , 1998 .

[46]  Parag Sen,et al.  Exploring role of environmental proactivity in financial performance of manufacturing enterprises: a structural modelling approach , 2015 .

[47]  Elisabeth Albertini,et al.  Does Environmental Management Improve Financial Performance? A Meta-Analytical Review , 2013 .

[48]  B. Jaggi,et al.  AN EXAMINATION OF THE IMPACT OF POLLUTION PERFORMANCE ON ECONOMIC AND MARKET PERFORMANCE: PULP AND PAPER FIRMS , 1992 .

[49]  Nuria E. Hurtado-Torres,et al.  Environmental strategy and performance in small firms: a resource-based perspective. , 2008, Journal of environmental management.

[50]  Stephen Martin,et al.  Advanced Industrial Economics , 1994 .

[51]  S. Schaltegger,et al.  The Effect of Corporate Environmental Strategy Choice and Environmental Performance on Competitiveness and Economic Performance:: An Empirical Study of EU Manufacturing , 2004 .

[52]  Juan Alberto Aragón Correa.  Strategic proactivity and firm approach to the natural environment , 1998 .

[53]  Martin Lindell,et al.  Environmental Management: Testing the Win‐Win Model , 2000 .

[54]  Toshiyuki Sueyoshi,et al.  Can environmental investment and expenditure enhance financial performance of US electric utility firms under the clean air act amendment of 1990 , 2009 .

[55]  Dietrich Earnhart,et al.  Effect of pollution control on corporate financial performance in a transition economy , 2007 .

[56]  A. Campbell,et al.  Corporate strategy: The quest for parenting advantage , 1995 .

[57]  S. Zeng,et al.  Impact of cleaner production on business performance , 2010 .

[58]  Aie.  CO2 Emissions from Fuel Combustion 2015 , 2015 .

[59]  Marno Verbeek,et al.  A Guide to Modern Econometrics , 2000 .

[60]  Robert Innes,et al.  Environmental innovation and environmental performance , 2010 .

[61]  Mark A. Cohen,et al.  Environmental and Financial Performance: Are They Related? , 1995 .

[62]  Wallace E. Oates,et al.  Tightening Environmental Standards: The Benefit-Cost or the No-Cost Paradigm? , 1995 .

[63]  Abagail McWilliams,et al.  Corporate social responsibility and financial performance: correlation or misspecification? , 2000 .

[64]  S. Hart.  Beyond Greening: Strategies for a Sustainable World. , 1997 .

[65]  Madhu Khanna,et al.  Toxics Release Information: A Policy Tool for Environmental Protection , 1998 .

[66]  W. Davidson,et al.  Corporate Environmental Initiatives and Anticipated Firm Performance: The Differential Effects of Process-Driven Versus Product-Driven Greening Initiatives , 2000 .

[67]  Michael J. Lenox,et al.  Does It Really Pay to Be Green? An Empirical Study of Firm Environmental and Financial Performance: An Empirical Study of Firm Environmental and Financial Performance , 2001 .

[68]  J. Aragón-Correa.  Strategic proactivity and firm approach to the natural environment , 1998 .

[69]  V. Magness.  Strategic posture, financial performance and environmental disclosure: An empirical test of legitimacy theory , 2006 .

[70]  Philippe Menanteau,et al.  Prices versus quantities: choosing policies for promoting the development of renewable energy , 2003 .

[71]  J. Aragón-Correa.  RESEARCH NOTES. STRATEGIC PROACTIVITY AND FIRM APPROACH TO THE NATURAL ENVIRONMENT. , 1998 .

[72]  Samuel B. Graves,et al.  A Look at the Financial-Social Performance Nexus when Quality of Management is Held Constant , 1999 .

[73]  F. Bellavance,et al.  Causality Between Corporate Social Performance and Financial Performance: Evidence from Canadian Firms , 2009 .

[74]  Julian Birkinshaw,et al.  Organizational Ambidexterity: Balancing Exploitation and Exploration for Sustained Performance , 2009, Organ. Sci..

[75]  Staffan Jacobsson,et al.  Are tradable green certificates a cost-efficient policy driving technical change or a rent-generating machine? Lessons from Sweden 2003–2008 , 2010 .

[76]  Jonathan L. Johnson,et al.  Beyond “Does it Pay to be Green?” A Meta-Analysis of Moderators of the CEP–CFP Relationship , 2013 .

[77]  Sanjay Sharma,et al.  A Contingent Resource-Based View of Proactive Corporate Environmental Strategy , 2003 .

[78]  P. Eng.  CO2 emissions from fuel combustion: highlights , 2009 .

[79]  M. Russo,et al.  A Resource-Based Perspective On Corporate Environmental Performance And Profitability , 1997 .

[80]  Till Stenzel,et al.  Regulating technological change—The strategic reactions of utility companies towards subsidy policies in the German, Spanish and UK electricity markets , 2008 .