Paper: arXiv 2601.22167

Authors: Robin Fischer, Anton Pichler

Abstract

Mobilising private capital is a critical bottleneck of the energy transition, yet recent crisis-driven windfall profits for fossil power firms suggest that market signals may still favour carbon-intensive assets. Here we analyse a panel of 900 European power firms (2001-2023) to resolve whether these profits reflect a durable profitability advantage or a crisis-driven anomaly. Using machine-learning clustering and Bayesian model averaging, we identify a structural divergence: wind and solar portfolios exhibit rising profitability, with return on assets among wind-dominated firms increasing by over 6% between 2014 and 2023. Conversely, higher fossil portfolio shares are increasingly associated with lower profitability, with marginal effects reaching -4% by 2023, while renewable-dominated firms match or outperform their fossil-heavy counterparts across most European regions. These findings suggest that the record profits of fossil incumbents were distinct outliers, masking an ongoing decline in the profitability of carbon-intensive business models.

Complexity vs Empirical Score

  • Math Complexity: 4.5/10
  • Empirical Rigor: 8.5/10
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper provides a rigorous empirical examination of European power firm profitability using dynamic time warping clustering and Bayesian model averaging on a 2001-2023 panel dataset. While the underlying mathematical theory is straightforward, the empirical methodology, robustness checks, and clarity of presentation are outstanding, challenging prevailing market assumptions about fossil vs. renewable returns.

Research Flowchart

  flowchart TD
    A[Research Goal: Assess profitability gap<br/>between Renewable & Fossil Power Firms] --> B[Data Inputs: Panel of 900 European<br/>Power Firms, 2001-2023]
    B --> C[Machine Learning Clustering<br/>Firm Portfolio Identification]
    C --> D[Bayesian Model Averaging<br/>Econometric Analysis]
    D --> E[Key Finding 1: Wind/Solar Profitability<br/>ROA increased by >6% 2014-2023]
    D --> F[Key Finding 2: Fossil Portfolio Decline<br/>Marginal profitability down to -4% by 2023]
    E & F --> G[Outcome: Fossil windfall profits were outliers;<br/>market signals favor renewable transition]

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0 of 61 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.