Cash flow investment, external funding and the energy transition: Evidence from large US energy firms

• Published in: Energy policy Vol. 181; p. 113720
• Main Authors: Restrepo, Natalia, Uribe, Jorge M.
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.10.2023
• Subjects: Constrained energy firms; debt; Ecological transition; energy; energy industry; energy policy; External debt; Internal funding; macroeconomics; renewable energy sources; O13; Ecological transition; C22; Internal funding; Constrained energy firms; G32; Q40; External debt
• ISSN: 0301-4215; 1873-6777
• DOI: 10.1016/j.enpol.2023.113720

We examine the relationship between cash flow and investment in the US energy sector from 1988 to 2020. Our analysis incorporates firms’ financial constraints and the type of energy production in which they are engaged, distinguishing between brown and green generation. Our findings reveal a positive relationship between investment and cash flow for green energy firms, which behave similarly to constrained energy firms. While traditional brown energy firms tend to use higher cash flow to increase dividend payments and repurchase equity, green and constrained firms use it to repay debt and to fund investment. Our results suggest that policies aimed at strengthening the linkages between financial intermediaries and green firms could unlock cash flow resources for investment and innovation, facilitating the scaling up of operations during the energy transition. To ensure the sustainability of the transition, it is critical to reduce the reliance of green energy firms on internally generated cash flow, which is subject to volatility and cyclical macroeconomic conditions. •Analysis of US energy sector investment-cashflow sensitivity: 1988–2020.•Constrained energy firms show a positive investment-cashflow sensitivity.•Green energy firms exhibit a positive investment-cashflow relationship.•Brown energy firms use higher cash flows for dividend payments and equity buybacks.•Strengthening links between intermediaries and green firms might unlock cash flow.