Will energy transitions impact financial systems?

Abstract

A low-carbon transition requires changes in the energy structure that may affect the financial system. However, little theoretical and empirical evidence has been produced regarding the interaction between different subsystems. This article presents empirical evidence regarding the relationship between energy and financial systems using the wavelet analysis which considers possible cyclical properties that change over time. The wavelet coherence coefficients based on the data for the United States suggest that the electricity price is closely related to shares of different energy-powered electricity production, but has weak relationships with the interbank connectivity and bank failures. The phase differences show that increases in nuclear energy-powered electricity generation reduce the electricity price at less than one and a half years of scale, but rise it at approximately three years of scale. However, different energy shares have little effect on the interbank connectivity. An increase in renewable energy in producing electricity may reduce the number of failed banks, whereas an increase in nuclear energy has an opposite effect. Therefore, the energy transition affects the financial system and excessively fast investment in nuclear energy may threat the bank sector and thus endanger the financial system. The Nuclear Renaissance program should be treated with caution.