Capital Structure Effect on Performance in Renewable Energy

not bad(p) organise Effect on carrying into action in renewable EnergySarah Sophia HamdiCapital Structure Effects on household Performance in the renewable Energy Sector Evidence from Germany1. Explanation of your dissertation topic (about 800 words)Overall motivation and objectivesThe Kyoto Protocol induced a growing number of countries to establish targets for renewable capacity supplies to reduce greenhouse gas emissions as well as to increase energy security. These targets atomic number 18 either explicit in terms of installed capacity or as a percentage of energy consumption. These targets have served as important catalysts for increasing the sh be of renewable energy without the world.As a result of the growing share of energy generated from renewable sources such as wind, water and biomass Germanys energy supply is turn greener from socio-economic class to year. As shown in graph 1 in 2014 renewables already accounted for 25.8 per cent of the gross power production in Germany. On 1 April 2000 the Renewable Energy Sources Act (EEG) went into force and lead to a massive increase of the renewable energy production in the electricity sector, from under 40 to oer 140 billion of kilowatt per hours (see graph 2).Graph 1 Gross power production in Germany in 2014Source AG Energiebilanzen, as of declination 2014Graph 2 Gross electricity generation in billions of kilowatt-hoursSource BMWi based on Working Group on Renewable Energies Statistics (AGEE-Stat, August 2014 foregoing figures)The German government wants to further flip ones lid this share by the year 2025, the aim is to produce 40 to 45 per cent of electricity from renewable sources and 55 to 60 per cent by the year 2035. These numbers indicate that renewable energy companies increasingly need to compete efficiently against existing companies generating energy through other power sources such as oil, nuclear and hard coal energy etc.As investments in renewable energy plants grow, so do the r isks inherent in owning, building and operating such plants. Excluding debt, business risk is the basic risk of firms operations and one of the factors that influence a companys crown- organise decision making. The level of business risk is shaped not only by the companies decisions but by whats happening to the industry and the economy. The renewable energy industry is effected by numerous sector specific risks such as building and testing risk, business, environmental, financial, marketplace, operational, political/regulatory and weather related volume risk. In such a risky industry, what otherwise would be an appropriate and safe amount of debt becomes more dangerous and unstable, so that normally equity financing is safer than through debt. However firms that are in the growth stage of their cycle typically finance that process through debt and borrow money to enable their growth. The conflict that arises with this method is that the revenues of growth firms are typically unst able and unproven. Meaning that a high debt load is usually not appropriate due to the danger of financial embarrassments. Hence as companies expand their investments in renewable energy projects, funding is a particular challenge and questions about firms dandy structure decisions are not easily answered.Theoretical reasonOver the last few decades much look for has been done on whether a relationship between with child(p) structure and a firms financial work exists. At this point I would like to include a detailed literature review.Franco Modigliani and Merton Miller formed with their theorem the foundation for modern thinking on jacket structure. They developed the Capital Structure Irrelevance Proposition where they hypothesized that in perfect markets the capital structure of a firm does not influence its performance. Nevertheless the theorem is by and large viewed as a highly theoretical hypothesis, since it disregards important factors such as transaction costs and unce rtainty, it was often used as the basis for further research in the last decades. The pecking-order theory, the agency theory and the trade-off theory are the three main theories discussing the optimal capital structure of a firm. All of them wed different approaches which I will summarise and contrast with each other.The different theories and findings raise key questions such as whether it is possible to identify an optimal capital structure for firms operating in the important and future-oriented industry of renewable energies.Research epitome and methodologyFollowing to the introduction of the key theories and the literature review on this topic I would like to carry out my own quantitative study and run a regression analysis with financial information of 20 companies operating in the renewable energy sector, including wind, solar, bio and water energy in Germany. Due to the fact that non-listed firms are not required to disclose their financial accounts my data will be gaine d from listed companies that are obligated to share the relevant information. I would like to examine whether there exists a relationship between the implemented capital structure and the firms performance measured in return on equity and share price.Equations (1)(2)Where return on equity for firm i in year t. price of a share for firm i at year t. financial leverage for firm i at year t . plain assets for firm i at year t. size of the firm i at year t. growth of the firm i at year t. material assets, size and growth serve as control variables whereas financial leverage of the firm is considered as the main variable to express the capital structure.My aim is to be able to match one of the three theories and to identify an optimal capital structure for renewable energy firms. In order to interpret the findings of the quantitative analysis I would also like to include a complementary qualitative research analysis for example through directors statements on their financing decisi ons.2. 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