A new analysis by a trio of Grant Thornton experts (Tomas Freyman, Jade Palmer, and Axel Rescanieres) addresses income approach valuation issues in renewable energy—a topic made more important because Europe’s investments in this area increased 52% last year, while the rest of the world, including the US, China, and India, dialed back.

The article, “Does CAPM Work for Valuing Renewable Energy Assets,” (available for download here) highlights some of the differences in the risk/return characteristics of this asset class. Long-term incentive schemes such as feed-in tariffs are one example, but renewable projects also have less leverage than other infrastructure investments, particularly in the UK, the authors note.

These factors alter most of the elements of CAPM analyses. For example, the data set for betas “is still limited and is coupled with no sufficiently strong index to compare.” Similarly, the authors point out that these projects have little input price or product price variation, so standard corporate ERP numbers may also provide inconsistent valuations.