Finnish electricity producers' earnings in 2022

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School of Business | Master's thesis
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Date

2024

Department

Rahoituksen laitos

Major/Subject

Mcode

Degree programme

Finance

Language

en

Pages

45 + 7

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Abstract

This thesis studies Finnish electricity producers’ earnings in the period 2013-2022 as an application of Li & Mohanram’s 2014 Residual Income (“RI”) model. The coefficients gained from estimating the full RI model are slotted back into the data and the consequent forecasts are compared to realised earnings figures per firm-year, including 2022 figures which are not included in the estimation data. Forecast errors are then compared between years, with the hypotheses that 2022 forecasts are too low or the errors more pronounced compared to other sample years. The same analyses are conducted to a control sample to assess, whether any effects found are specific to electricity producers. After adjusting for the write-downs caused by the cancellation of the Fennovoima nuclear power plant, which impacted ca. half of the sample, the forecast errors show the hypothesised effect of the forecasts being too low in 2022 on a nominal average sample level. However, when the forecasts are scaled with total assets, the anomaly largely disappears, indicating that the higher-revenue firms in the sample were the main ones to benefit from elevated electricity prices in 2022. This is likely to be related to the smaller sample components buying a larger share of their electricity from the market, and not producing as much themselves (or through their shares in Mankala companies) as the higher-scale firms in the sample. There are also indications of higher volatility in the asset-scaled forecast errors in both 2022 and 2021 than in the rest of the sample, indicating increased earnings unpredictability – this effect in turn seems to be driven by the smaller sample components.

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Thesis advisor

Kaustia, Markku

Keywords

energy, electricity, earnings, return on assets, hedging, forecast, forecast error, residual income model

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https://urn.fi/URN:NBN:fi:aalto-202408185440

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[gradu] Kauppakorkeakoulu / BIZ