Valuation Methods in Renewable Energy Investments: An Explanatory Mixed-Methods Study among German and Swiss Investment Professionals

This research aims to evaluate the currently applied valuation approaches in practice among German and Swiss professional investors for renewable energy (RE) projects based on an explanatory, sequential, mixed-methods (MM) research approach, compared to existing financial theory. It additionally explores associated influencing factors, key equity value drivers, and ‘best practice’ approaches and/or improvements in order to propose a revised valuation approach specifically for such investments. The inferences (INFs) taken are obtained by integrating quantitative (QUAN) results from a survey of 111 practitioners with qualitative (QUAL) findings through in-depth interviews with 16 purposefully selected individuals from the pool of participants from the previous QUAN phase to explore those results in more detail. The results and findings were both reassuring and surprising while still detecting a certain gap between theory and practice. As main research outcomes, it can be illustrated that both systematic and unsystematic risks are relevant for performing valuations of such investments. More specifically, for the former, political and market risks are the most important risk components, and for the latter, weather-related volume risk is most important. Risk preferences and subsequently valuation are clearly influenced by experienced materialisation of risk. Discounted cash flow (DCF)-based valuation is state of the art in this valuation, even if multiples are applied as a simplified benchmarking approach. Encountered risk leads either to adjustment in the cash flows or in the applied discount rate, the former being the main approach to treat risk in valuation. The internal rate of return (IRR) approach is the most frequently applied valuation methodology, even if the net present value (NPV) approach is theoretically more consistent and even though many practitioners do not seem to be aware of the former’s potential drawbacks. Moreover, the market for such investments has agreed to apply a simplified flow to equity (FTE) valuation approach. It thus ignores the consideration of the right type of discount rate (a dynamic discount rate) for the typically applied autonomous financing structure based on project financing for simplification reasons. Market participants surprisingly still use the weighted average cost of capital (WACC) of the investing company, mostly as a basis for defining hurdle rates, even if finance theory could clearly demonstrate its irrelevance as a cost of capital (CoC) approach in DCF-based valuation. More sophisticated valuation methods are less known and not applied, even if the certainty equivalent (CE) and adjusted present value (APV) methods are promising, complementary methods to support conventional approaches for assessing the investment’s value protection ability and performing impairment test respectively. The discussion of the INF analysis results helps to increase the understanding of this complex topic and provides valuable insights into this usually hidden procedure. The applied MM approach allowed for the exploration of issues and the discussion of possible improvements in valuation practices, which would not be possible within a classic quantitative study. The developed concepts in this thesis provide practitioners, particularly equity investors, with powerful tools to define the relevant equity value drivers, to understand additional influencing factors in valuation and considerations of risk treatments in projects, and to value RE investments along the two dimensions of value creation and value protection