October 2021: Prof. Dr. h.c. Dr. h.c. Stefan Reichelstein, Ph.D.

Stefan Reichelstein, Director of the Mannheim Institute for Sustainable Energy Studies at the University of Mannheim, is a principal investigator of the project A04 “Accounting for Investments in Operating Assets”. Together with Anna Rohlfing-Bastian, he examines how accounting information can provide a transparent basis for decisions on operating investments. He is particularly interested in research on the cost structure and competitiveness of decarbonized energy sources. During his time at Stanford University, he had already devoted considerable attention to this subject.

Accounting: it‘s all about information

When I came to Northwestern University as a doctoral student in Managerial Economics, it was a truly exciting time for managerial economics. A new research paradigm was just being developed and applied to different subfields in management: information economics. Information was suddenly in the spotlight. An exciting new perspective that led me to accounting. Modeling information asymmetry, analyzing the emerging models, and drawing conclusions from the findings simply appealed to me – and it still does today. Back then, there was a lot of pioneering work to be done in this area. Accounting has traditionally been very hands-on, but was not rich in modeling frameworks. Then as now, accounting is well positioned in terms of institutional observations and the availability of data. Today there is more interaction between models and empirical research to test these models. This is very helpful for a high-impact research.

If you want to be successful as a researcher in the long run, you should ask yourself: To what topics and questions can I really contribute.

Chasing research niches vs. long-term agenda

Sometimes I see researchers wandering into a new field with a new set of research tools, simply because they see an opportunity for a quick journal publication. But, in my mind, chasing opportunities is not a good approach in the long run. If you want to be successful as a researcher in the long run, you should ask yourself: to what topics and questions can I really contribute – over the course of several years or maybe even decades? A contribution for the research community, for practice and politics, for society. Research is a marathon, not a sprint. You need perseverance and the tolerance to be frequently frustrated. Most of the time you are addressing questions to which you don’t know the answer. Many days you will walk home scratching your head and thinking: this didn’t go well … That is the nature of our work. And it is easier to cope with these frustrations if you are properly grounded in your research topic and take a long-run perspective.

I realized that if the energy transition was supposed to succeed, we needed models that could reliably calculate these costs.

Decarbonization: from hobby to vocation

About ten years ago a new topic, that now has become a focus of my research, caught my attention: the cost structure and competitiveness of decarbonized energy sources. It all started with a public discussion about the so-called energy transition and different estimates about the costs it would incur. What struck me was how these estimates were all over the place. Some of them were off by orders of magnitude. I realized that if the energy transition was supposed to succeed, we needed models that could reliably calculate these costs. I therefore started working on those models. In my first publication in this area, I developed a model that calculated what it would cost for a coal-fired power plant to capture the C02 emissions instead of letting the CO2 go into the atmosphere. What started out as a kind of hobby is now a key focus of my research. And by now, the topic has also become firmly established in business administration and accounting. The University of Mannheim, for example, has founded the Institute for Sustainable Energy Studies (MISES) in 2019.

‘Better economic decisions through more informative accounting’ is also the basic theme of the TRR 266 “Accounting for Transparency.

More transparency, better decisions

My research in the field of decarbonization is also about transparency. The models and calculations I develop together with my research team are intended to make the costs of the energy transition transparent and to help investors and policy makers make informed decisions. For policy makers, for example, it is important to know how much public support is needed so that low carbon energy sources succeed in the market. For example, our models may help decide the need for financial incentives such as tax incentives or feed-in tariffs. This approach of “better economic decisions through more informative accounting” is also the basic theme of the TRR 266 “Accounting for Transparency”. While writing the proposal for this collaborative research center, it soon became clear to us that our research on decarbonization should be part of the TRR 266.

We focus on how the transition to a decarbonized energy future can be accelerated.

Investment decisions: What information do decision-makers need?

Within the TRR 266, I am a principal investigator of the project A04, “Accounting for Investments in Operating Assets”. Together with Anna Rohlfing-Bastian, we seek to understand what information companies, regulators, and investors need in order to make and monitor investment decisions. For example: When a company builds a new production facility, one of the central questions is how do we account for it – value it – in future years? What are the implications of different accounting rules in terms of how the company reports costs and profitability? The research within this project offers many points of contact for my research on decarbonization. In particular, we focus on how the transition to a decarbonized energy future can be accelerated and try to find out what incentives are needed to make that happen.

Wind and solar energy are steadily improving their LPM and thus their competitiveness.

Novel metric: How competitive are renewables?

Recently, we came out with a new working paper that introduces a metric called levelized profit margins (LPM). This metric helps us capture the changing unit economics of both intermittent and dispatchable energy sources, specifically renewable low-carbon and fossil energy sources. This metric integrates the countervailing effects that determine the level of revenues and costs of the different energy sources. While the life-cycle costs of renewables are getting cheaper, the cost of fossil energy sources increase. Thus, renewable energy has a clear advantage in this regard. But it also has a big problem: its intermittency. Especially during the so-called dark doldrums, which typically strike regions of Germany in the late fall, when there is little sunlight and wind is not strong. During those seasons renewable energy can only be generated to a limited extent. Dispatchable energy sources then benefit because of a price premium they earn during those seasons. Weighing these countervailing effects, our research in the context of Texas and California shows that wind and solar energy are steadily improving their LPM and thus their competitiveness. Their costs have fallen so steeply that they are able to compensate for diminishing average revenues.

When it comes to the competitiveness of renewables, energy storage will be crucial.

Energy storage: opportunity and challenge

When it comes to the competitiveness of renewables, energy storage will be crucial, because storage can address the intermittency problem. Take for example hydrogen energy storage. The surplus of energy created by renewables during low energy demand periods can be used to power electrolyzers that then produce hydrogen from water. The gas can be stored and could be used for power generation at times of limited supply capacity of renewables. However, energy storage is one of the most complex problems. Again, it comes down to the following question: How fast will these technologies and their efficiency evolve? This is another issue we are currently addressing – for example in our working paper “Cost dynamics of clean energy technologies”.

Carbon footprint: we definitely need more transparency in this regard.

Carbon footprint: More transparency through binding measures

Another topical question we address is: How should we measure the carbon footprint of companies? Many companies have come out in recent years with a promise to reduce their carbon footprint. Since this is at the moment all voluntary, there a currently no commonly accepted standards that define how to measure and corporate carbon footprints. As a result, more and more companies have started to develop their own metrics. The problem is: since everybody is doing their own thing, these metrics are neither comparable nor informative. We also explain this in a recent working paper. We definitely need more transparency in this regard.

*The article reflects the opinion of the researcher and not necessarily the views of the TRR 266. As a scientific association, the TRR 266 is committed to both freedom of speech and political neutrality.