Gains From Energy Transition Gaps: Adaptive Moves to Winning Strategy
Abstract: Financial economics optimizes value by reducing deviations (or risks) from expected outcomes (or returns). It errs when managerial aversions or preferences, volatilities, and prior commitments are ignored. To profit from transitioning energy markets, managers need to explicitly evaluate the returns impact of rivalries, pacing, and the interacting portfolio effects. In this paper, we evaluate how geocentric resources (i.e. hydro and geothermal) differ in their strategic endowments from those involving the harvesting of disperse energy (i.e. wind, solar, and photovoltaic). Under dynamic markets, asymmetric costs facilitate portfolio benefits through diversification, and switching options when there is managerial flexibility. Geocentric resources confer early mover’s advantage by locking out rivals, while encouraging managers at act now to avoid incurring high deferral costs. Counter-intuitively, for solar and photovoltaic, the opposite is the case for two reasons: Low output reduces the foregone returns. Rapid asset costs decline offer the prospect of substantial savings on future capex. Combined, managerial inaction enhances portfolio value and competitiveness. Strategically, for fossil fael supply portfolios, value is optimized under unconstrained markets by first diversifying with geocentric resources. Wind could follow, with photovoltaic and solar (and possibly battery storage) as later stage options.
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Authors: Ricardo G. Barcelona
