Valuation of Renewable Energy Investments (eBook)

Dedication 6
Acknowledgment 7
List of Content 8
Abbreviations 12
List of Figures 15
List of Tables 19
Abstract 25
1 Introduction 27
1.1 Background and Relevance of Research 27
1.2 Scope and Framework of Research 28
1.3 Contribution to Research 31
1.4 Research Approach 32
1.5 Publications 33
1.6 General Outline of the Thesis 34
2 Literature Review 37
2.1 Renewable Energy Projects and Investors 37
2.1.1 Characteristics of RES-E Projects 37
2.1.2 Investors and Investment Motives 38
2.2 The Concept of Risk, Return, and Value 40
2.2.1 Risk and Uncertainty 40
2.2.2 Probability/Likelihood and Consequence 45
2.2.3 Strategic Considerations of Handling and Managing Risk 45
2.2.4The Risk-Return Trade-Off Concept 51
2.2.4.1 Valuing Risk, Risk Premium, and Expected Return 51
2.2.4.2 Risk-Return Trade-Off 52
2.2.4.3 Project Life Cycle 54
2.2.5 The Concept of Diversification 55
2.3 Risk Management in Valuation 58
2.3.1 Assessment of Uncertainty and Risk 58
2.3.2 Risk Components in RES-E Projects 59
2.3.3 The Integrated Risk-Return Concept 66
2.3.3.1 Project’s Stand-Alone Risk in Valuation 68
2.3.3.2 Market or Within-Firm Risk in Valuation 73
2.3.4 Risk Mitigation 75
2.4Capital Budgeting Techniques 78
2.4.1Finance-Mathematical Concepts 78
2.4.1.1Time Value of Money 78
2.4.1.2Cash Flow Streams and Valuation Phases 79
2.4.1.3Financing Policies 81
2.4.2Reviewing Existing Valuation Methodologies 82
2.4.2.1Discounted Cash Flow-based Methods 83
2.4.2.2 The NPV and IRR 94
2.4.2.3 Non-DCF-based Methods 99
2.4.2.4Real Option Valuation 101
2.4.3Basics of CoC Approaches 105
2.4.3.1Opportunity Costs and Equivalent Principle 105
2.4.3.2Weighted Average Cost of Capital 106
2.4.3.3Hurdle Rate Approach 108
2.4.3.4Discount Rate, Risk, and Time Value of Money 110
2.4.4Risk Treatment within Valuations 110
2.4.4.1Risk-Adjusted Discount Rates 110
2.4.4.2Financial and Risk Performance Measures 112
2.4.4.3Certainty Equivalent Method 113
2.4.4.4Decoupled NPV 115
2.4.4.5Integrated Risk Return Management process 115
2.5 Theoretical Principles about CoC 116
2.5.1Capital Asset Pricing Model and Alternative Approaches 116
2.5.2Estimating Expected Returns of NTAs 119
2.5.2.1Indirect Approach 119
2.5.2.2Proxy Techniques 120
2.5.2.3Qualitative Approach 121
2.5.2.4Semi-quantitative Approach 121
2.6 Investment Appraisal—Value, Price, Measures, and Managerial Judgement 124
2.6.1Value-based Management 124
2.6.2Value, Price, and Influencing Factors 126
2.6.3Feasibility and Viability Measures for Investments 128
2.6.4Non-numerical Factors and Managerial Judgements in Investment Appraisals 129
2.7 Summary and Conceptualisation 131
2.7.1Summary of Literature Review 131
2.7.2Research Gaps 131
2.7.3Conceptual Framework 133
2.7.4Initial Subcategories and Themes 134
3 Research Philosophy and Ethics 136
3.1 Research Philosophy 136
3.1.1Research Philosophy in Literature 136
3.1.1.1Definition and Relevance of a Philosophical Stance 136
3.1.1.2Positivism versus Interpretivism 139
3.1.1.3Connecting Philosophical Stances with Methodological Approaches 140
3.1.2Philosophical Stance and Assumption of this Research 141
3.1.2.1Critical Realism as Underlying Research Stance 141
3.1.2.2Critical Realism and MMR 146
3.1.2.3Critical Realism and Researcher’s Values 148
3.2 Research Ethics 149
3.2.1Ethical Considerations in Quantitative Phase 150
3.2.2Ethical Considerations in Qualitative Phases 150
4 Empirical Research Approach and Methods 152
4.1 Data Collection and Data Analysis in MMR Design 152
4.1.1 Mixed-Method Approach in Literature 152
4.1.1.1Terminology 152
4.1.1.2Rationale for Choosing the MMR Approach 154
4.1.1.3Exclusion of Other Research Approaches 156
4.1.14Mixed-Method Processes and Typology Design 157
4.12Applied MM in this Research 161
4.1.2.1Applied Explanatory Sequential Design 161
4.1.2.2Overview and Research Stages 165
4.1.2.3Justification for the Chosen Approach 166
4.1.2.4Applied Data Collection and Analysis Methods 168
4.1.3Targeted Population and Sampling Strategy 171
4.1.3.1Sampling Technique in Exploratory qual Phase 173
4.1.3.2Sampling Technique in QUAN Phase 174
4.1.3.3Sampling Technique in QUAL Phase 176
4.2 Initial Exploratory Qualitative (qual) Interview Phase 179
4.2.1Data Collection Exploring Process 179
4.2.2Initial Data Analysis 179
4.3 Primary Quantitative (QUAN) Survey Phase 180
4.3.1Research Hypotheses 180
4.3.2Quantitative Data Collection 181
4.3.2.1Designing the Questionnaire 181
4.3.2.2Performed Quantitative Data Collection 183
4.3.3Structure of Survey Questionnaire 184
4.3.3.1Risk Assessment 184
4.3.3.2Risk Mitigation 185
4.3.3.3Capital Budgeting Techniques 186
4.3.3.4Cost of Capital 186
4.3.3.5Valuation Adjustments for Specific Risk Components 187
4.3.4Statistical Analysis 190
4.3.4.1Data Processing before Analysis 190
4.3.4.2Performed Statistical Analysis 190
4.4 Primary Qualitative (QUAL) Interview Phase 194
4.4.1Research Design of Qualitative Research 194
4.4.1.1Interview Protocol Development 194
4.4.1.2Investment scenarios 194
4.4.2Qualitative Data Collection and Documentation Process 195
4.4.3Qualitative Data Analysis 196
4.4.3.1Coding Qualitative Data 197
4.4.3.2Computer-Assistant QDA Software (CAQDAS) 199
4.4.3.3Presentation of Findings of Qualitative Analysis 200
4.5 Inference Phase 202
4.5.1Minor Stages of Integration 202
4.5.2Primary Stage of Integration 202
4.5.3Inference Analysis and Framework Development 203
4.6 Quality, Validation, and Credibility of Research 204
4.6.1Mixed-Methods Research Quality 204
4.6.2Assuring Validity of the Qualitative Phases 207
4.6.3Validity Check of the Quantitative Phases 209
4.6.3.1Non-Response Bias 209
4.6.3.2Robustness of Results 210
4.6.4Assuring the INF Quality 211
4.6.5Assuring the Quality in Relation to the Applied MMR Design 212
5 Results and Findings 214
5.1 Findings of Exploratory Qualitative (qual) Phase 214
5.1.1Inputs for QUAN Phase 214
5.1.2Inputs for QUAL Phase 215
5.2 Results of Quantitative (QUAN) Analysis 216
5.2.1Firm and Participant Statistics 216
5.2.2Analysis Results 217
5.2.2.1Risk Assessment 217
5.2.2.2Risk Mitigation 222
5.2.2.3Capital Budgeting Techniques 223
5.2.2.4Cost of Capital 224
5.2.2.5 Valuation Adjustments for Specific Risk Components 226
5.2.3Results of Validity Check 228
5.2.4Support and Rejection of Hypotheses 228
5.2.3Interesting Phenomena to be Analysed in QUAL Phase 232
5.3 Findings of Qualitative (QUAL) Analysis 234
5.3.1Findings from Investment Scenario Discussions 234
5.3.2General Findings about Valuation Processes 237
5.3.3Numerical Approaches in Capital Budgeting 239
5.3.3.1Discount Cash Flow-based Methods as Main Valuation Approaches 239
5.3.3.2The IRR and/or NPV 242
5.3.3.3Cash Flow Levels—Entity and/or Equity Approach 243
5.3.3.4Distribution Potential to Equity Investors 245
5.3.3.5Certainty Equivalent Approach 248
5.3.3.6Profitability Index 249
5.3.3.7RES-E-specific Multiples 250
5.3.3.8Payback Period Approach 251
5.3.4Judgmental Approaches in Capital Budgeting 252
5.3.4.1Evidence for Judgmental Assessments in RES-E Valuation 252
5.3.4.2Due Diligence and Transaction Processes 254
5.3.4.3Key Characteristics of RES-E Projects 256
5.3.4.4Synergies, Upside Potential, Existing Portfolio, and Diversification 259
5.3.5Cost of Capital Approaches 262
5.3.5.1Discount rates 262
5.3.5.2Equity and/or Total CoC (Project Return Rate) 263
5.3.5.3Setting Return Rates with Theoretical Concepts 266
5.3.5.4Setting Return Rates with Market Sounding 268
5.3.5.5Hurdle Rates 270
5.3.5.6Risk-Adjusted Discount Rate 273
5.3.5.7Static to Dynamic Discount Rates 274
5.3.6Risk Considerations in Valuation 275
5.3.6.1Risk Mitigation 275
5.3.6.2Valuation Adjustments for Risk 277
5.3.6.3Risk Components 278
5.3.6.4Risk Assessments 280
5.3.6.5Understanding Risk and Risk Preferences 281
5.3.6.6Explanations for Puzzling QUAN Result 283
5.3.7 Influencing Factors in Valuation 284
5.3.7.1Risk and Return 284
5.3.7.2Investment Pressure 287
5.3.7.3Market Forces 287
5.3.7.4Involved Parties—Experiences and Communication Process in Transactions 290
5.3.7.5Personal Interest, Incentives, and Biases 292
5.3.7.6Investor and Investment Strategy 293
5.4 Findings from INF Analysis 295
5.4.1Inferences within Capital Budgeting Approaches 295
5.4.2Inferences within CoC Approaches 297
5.4.3Inferences within Risk Assessment, Risk Mitigation, and Adjustments for Risk 298
5.4.4Inferences about Influencing Factors in Valuation 299
5.4.5Inferences about Answer Behaviour 300
5.5 Final Concepts 301
5.5.1Equity Value Driver and Influencing Factor Model 302
5.5.2Uncertainty/Risk Consideration Model in Valuation 304
5.5.3Integrated EVCaP Model 305
6 Conclusion and Outlook 308
6.1 Discussion 308
6.1.1Risk Components and their Prioritisation, Processing, and Impact on Valuation 308
6.1.2Applied Valuation Techniques and Encountered Influences and Deficiencies 311
6.1.3Proposed Valuation Concepts 314
6.2 Contribution to the Body of Knowledge 315
6.3 Contribution to Practice 317
6.4 Limitation of the Research 319
6.5 Direction for Further Research 320
6.6 Personal Reflection about Research Journey 323
Bibliography and References 325
Appendices 380
A1Value creation methods 380
A2Alternative CoC models to CAPM 380
A3Integrating Project Valuation and Risk/Uncertainty Management 386
A4 Interview candidates (QUAL phase) 387
A5Questionnaire 388
A6Post-hoc tests 402
A7Interview Protocol—1. part of interview (semi-structured interview) 403
A8Interview protocol—2. part of interview with the investment scenarios 406
A9QUAN result tables 410
A10Details of Validity Check in QUAN Phase 428
A11QUAL result tables 441
A12 Details about inference results 449
Endnotes 451