research@hec - Issue #18 - (Page IV)

Renewable Energies What Is Holding Investors Back? Andrea Masini research BIOGRAPHY Professor Andrea Masini is a member of the HEC Paris Operations Management and Information Systems department. His research focuses on the operational and organizational impact of technological innovation, with particular attention to information systems, renewable energies, and sustainable development. He also focuses on operations excellence in service and production activities. In 2009, the International Energy Agency (IEA) called for an “energy technology revolution” in order to cut carbon emissions in half by 2050. Developing renewable energies obviously requires innovation, which creates significant investment opportunities. Indeed, the Copenhagen treaty project estimates that investment in renewable energies needs to double by 2012 and quadruple by 2020. So why aren’t investors rushing into this market as eagerly as expected? A MATTER OF PROFITABILITY The recent economic crisis has affected the renewable energy sector both directly, through drops in liquidities, and indirectly, through a general decrease in demand for energy and drops in oil and gas prices. Nonetheless, Andrea Masini says the crisis might really be an opportunity to drive a lasting shift toward low carbon energy technologies. Renewable energies may consequently well enjoy renewed popularity as the crisis comes to an end. Investors who have stayed away from such technologies during the crisis because of high production costs should now be drawn to them. Their cost is likely to drop much faster than that of traditional energies, due to both learning and economies of scale. In this context, Masini’s study with Emanuela Menichetti looks for the first time at the causal link between the inclusion of renewable energy projects in an investment portfolio and its financial performance. Their research shows that “investors who have introduced a greater proportion of renewable energy projects into their portfolio have ben- Even though renewable energies are increasingly considered the energy proliferating, their place in investment portfolios remains small. Why? are holding investors back. sources of the future and associated government development initiatives are Andrea Masini and Emanuela Menichetti have unveiled behavioral factors that hec INVESTOR BIASES Masini and Menichetti highlight two factors that affect investment in renewable energies. First, investors’ confidence in the market’s ability to provide return on investment, and second, their confidence in a specific technology. The degree of confidence in the technology or project holds more weight in the decision-making process than confidence in the market. Indeed, investors seem to believe that market weaknesses can be corrected by public policy. As a result, technologies that have already proven effective are preferred to more radical energy innovation, even though the latter may yield greater profits in the long term. The Five Technologies Most Frequently Present in Investment Portfolios 1. Photovoltaics 2. Offshore wind power 3. Biomass 4. Solar thermal energy 5. Concentrated solar power (CSP) efited from slightly superior performance compared to direct competitors.” Yet above and beyond the question of profitability, the application of behavioral finance theory to the field of energy reveals new obstacles to investment. Masini and Menichetti have identified three types of mental blocks shared by all of the investors studied. These factors influence investors' desire to invest in or stay away from renewable energy projects. IV research@hec • December-January 2011

Table of Contents for the Digital Edition of research@hec - Issue #18

Cover & Contents
Anger in the Workplace Men vs.Women: Unequal in Ire?
Renewable Energies: What Is Holding Investors Back?
Strategic Experimentation: Observing Others to Determine Behavior
Lessons fromthe April 2010 Volcanic Ash Crisis

research@hec - Issue #18