Understanding Drivers of Renewable Energy Firm’s Performance

Abstract

The purpose of this study is to identify the drivers of profitability for renewable energy companies in the European Union (EU) during the period of 2004–2018. Specifically, the study investigates the effect of firm-specific, country-specific, and macroeconomic factors on the profitability of the listed renewable energy companies that have their headquarters in the EU. The profitability is measured as return on assets (ROA) and Tobin’s q. Factors that affect profitability are divided into three groups such as firm-specific, country-specific, and macroeconomic factors, and to provide consistent and unbiased results, distinct methods are used. The ordinary least square (OLS) and random effect Generalized Least Squares (GLS) model are employed first. Also, the two-step system generalized method of moments estimation is used to validate the hypotheses. The empirical findings show that firm-specific factors are more dominant in explaining profitability rather than macroeconomic factors. The dynamic models show that profit persists over the years. Also, it is revealed that firm size has a positive effect on profitability in all models. The hypothesis that firms’ growth enhances profitability is evident in the short run, but in the long run, it is insignificant. The leverage has a positive effect on Tobin’s q. In addition, the study finds that tradable green certificate schemes enhance long-term profitability (Tobin’s q). The financial crises discourage the financial performance of renewable energy firms. The study has implications for managers and policymakers that should give importance to firm-specific factors and country-specific factors to promote the profitability of renewable energy companies in order to be sustainable by reducing energy import dependency and ensure energy for the future generation. Special attention should be given to support schemes toward renewable energy to be more effective and enhance firm profitability. The contribution of this paper is that it is the first study that examines the drivers of profitability for renewable energy companies by accounting for firm-specific, country-specific and macroeconomic factors. The study includes a long-time period by using advanced panel data techniques. To add robustness, alternative measures of profitability are used.