Do renewable energy incentive policies improve the performance of energy firms? Evidence from OECD countries

• Published date: 01 June 2019
• Date: 01 June 2019
• Author: Aminu Hassan
• DOI: http://doi.org/10.1111/opec.12146

Do renewable energy incentive policies

improve the performance of energy firms?

Evidence from OECD countries

Aminu Hassan

Department of Accounting, Faculty of Management Sciences, Federal University Dutsin-Ma, Dutsin-Ma,

Nigeria. Email: ahassan@fudutsinma.edu.ng, ammhass@gmail.com.

Abstract

Natural capital inventory approach to sustainability accounting advocates accountability system

that keeps stock of natural capital intact. Substituting exhaustible energy resources with renewable

energies (RE) is a particular example of the ‘substitutability’condition for sustainability and a key

principle of the natural capital theory. This paper investigates the effects of RE incentive policies,

as facilitators of ‘substitutability’, on the financial performance of 420 energy firms in OECD

countries over 4 years (2013, 2014, 2015 and 2016). Findings reported using fixed effects panel-

data modelling reveal that most RE incentive policies deployed in OECD countries stimulate

improved accounting-based measures of financial performance. In addition, some incentive

policies that are long-term in nature appear value relevant. Overall, the paper documents that

substituting RE for fossil fuels, incentivised through RE policies, stimulates improved financial

performance of energy companies in OECD countries. The significance of these results is evident

in the empirical support they lend to the effectiveness of RE incentive policies, progress of global

energy transition and the natural capital inventory theory. Furthermore, the results could be of

benefit to policymakers, energy firms and investors.

1. Introduction

Currently, five major renewable energy (RE) sources including solar, geothermal, wind,

hydro and biomass are being harnessed to generate increasing amounts of renewable

energies. This is especially more so in developed countries. For example, in 2016, the

whole of Portugal relied solely on RE sources for 4 days (The Guardian, 2016). This

substantiates the fact that the world is indeed experiencing a transition from fossil fuels

to alternative energy sources. One of the key factors driving this transition is the

commitment of developed and, to some extent, developing countries to stimulate

transition from traditional hydrocarbons as the main sources of energy to renewable

sources (Simsek and Simsek, 2013). For instance, EU countries, several of which are

members of the OECD, have agreed to a binding commitment to generate at least 15 per

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cent of their energies from renewable sources (Leete et al., 2013). Similarly, the

contribution of RE to the energy mix of the OECD countries has been on the increase

since 2001, and so has been that of G20 countries (KPMG, 2015). The drive to develop

sources alternative to non-renewable energies emanated from developed countries (Leete

et al., 2013; Simsek and Simsek, 2013; de Arce et al., 2016) and is rapidly spreading to

other less-developed countries. In this regard, KPMG International (2015) reported that,

‘developing economies almost matched developed economies in RE investments’. Other

factors cited as driving transition to renewable sources of energy include climate change

(Wisniewski et al., 1995; Lo, 2014; de Arce et al., 2016; Jarke and Perino, 2017),

energy security (Shrimali and Kniefel, 2011; Lo, 2014), hydrocarbon price volatility

(Foxon et al., 2010; Shrimali and Kniefel, 2011), global increase in energy consumption

(Simsek and Simsek, 2013) and environmental degradations in general (Shrimali and

Kniefel, 2011). This indicates that one of the key objectives of RE incentive policies is

reduction of global environmental degradations associated with fossil fuels.

Accounting has an important role to play in measuring, analysing and reporting the

impact of sustainable development on firm performance. This is theoretically grounded

in the natural capital inventory accounting (Gray, 1992, 1994; Lamberton, 2005) which

is itself derived from the ecological economic theory of natural capital (Pearce, 1988;

Berkes and Folke, 1992; Costanza and Daly, 1992; Azqueta and Sotelsek, 2007). The

natural capital theory advocates reliance on non-depreciable natural capital as a

fundamental condition for sustainability (see van Geldrop and Withagen, 2000; Solow,

1974a,b). With sources of energy dominated by exhaustible (depreciable) fossil fuels, the

violation of this sustainability condition is inescapable. Consequently, ‘substitutability’

must be pursued to facilitate replacing the exhaustible fossil fuels with non-depreciable

energy sources to ensure the realisation of sustainability goals (Solow, 1974b). In the

context of energy resources, this is generally referred to as energy transition (Foxon

et al., 2010). Azqueta and Sotelsek (2007) enunciate the role of accounting in facilitating

‘substitutability’noting that in valuing natural capital, depreciation must be measured,

analysed, mitigated and accounted for. They, therefore, stress the need to value and

record changes in all forms of natural capital stock (including exhaustible and

inexhaustible resources) over time. As noted by Bartelmus (2009), accounting for natural

capital at the micro level provides a sound basis for the accurate determination of the

cost of natural capital consumption at the macro level. Based on this background, this

paper measures RE incentive policies designed to promote ‘substitutability’and evaluate

their effectiveness in stimulating the financial performance of energy companies.

More specifically, and consistent with the literature that analyses the influence of

public policies on various measures of firm performance, the current paper aims to

evaluate the effectiveness of RE incentive polices by investigating their influence on

accounting-based and market-based financial performance of energy corporations in

©2019 Organization of the Petroleum Exporting Countries OPEC Energy Review June 2019

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