The Widening Profitability Gap between Renewable and Fossil Power Firms in Europe

TL;DR

This study analyzes European power firms from 2001 to 2023, revealing a growing profitability gap favoring renewable energy firms over fossil fuel companies, which are experiencing declining returns.

Contribution

It provides a comprehensive analysis showing a structural divergence in profitability trends between renewable and fossil power firms using advanced machine learning and Bayesian methods.

Findings

Renewable firms' profitability increased by over 6% from 2014 to 2023.

Fossil fuel firms' profitability declined, with effects reaching -4% by 2023.

Fossil firms' recent profits are outliers, not indicative of a sustained trend.

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.