Risk Of Stranded Assets Research Articles

Stranded Asset Risk in the Bond Market

Asset stranding involves permanently shutting down productive but harmful facilities that impose negative externalities on society. Because bonds are a major source of funding for corporations, investors such as pension funds and insurance companies seeking to reduce their exposure to asset stranding have the potential to limit the supply of capital to polluting firms by divesting their holdings of the polluting firms’ bonds. We examine the implications of stranded asset risk for polluting firms regulated under the Clean Air Act (CAA). Polluting facilities located in counties in violation of the CAA are required to comply with the act’s provisions regardless of cost, leading to a contraction in capital for companies with facilities located in affected counties. More broadly, this study contributes to our understanding of whether and how pollution externalities affect private-sector capital supply to polluting firms.

Repurposing coal plants into thermal energy storage—a techno-economic assessment in the Indian context

Abstract Substantial coal phase out initiatives have been growing as the world mobilizes to meet the Paris climate goals. However, the stranded asset risk associated with this critical transition could fall disproportionately on Asian economies with younger coal fleets, like India. Here, we undertake plant-level techno-economic analysis to explore the value of installing commercially available, molten-salt thermal energy storage (TES) systems for repurposing existing coal power plants in the Indian context. We combine process simulation and an economic optimization model to evaluate design and operations of TES systems for a variety of technology assumptions, coal plant archetypes, and electricity price scenarios. Key drivers of economic viability identified include longer remaining plant lifetime, increasing peak TES temperature, lower TES energy capacity cost, co-production of waste heat for end-uses, and increasing temporal variability of electricity prices. The plant-level analysis was then extended to screen for the potential of TES retrofits within the coal power fleet in Uttar Pradesh, the most populous Indian state with a significant share of India’s coal capacity. Analysis for a single electricity price scenario indicates that over 82% of the coal units in the state can be retrofitted and recover the installed costs of TES retrofits, provided that fixed operating and maintenance costs are excluded. These results reinforce the opportunity for decision-makers to consider TES retrofits of coal plants into cost-effective grid decarbonization strategies.

Mitigation of the Stranded Asset Risk Due to the Implementation of Coal Plants Early Retirement in Indonesia Using Analytical Hierarchy Process

Based on Presidential Regulation Number 112 of 2022 concerning the Acceleration of Renewable Energy Development for the Supply of Electric Power, Indonesia has a road map in which there is a strategy program for accelerating the end of the operational period of PLTUs. In implementing early retirement, there is a risk of stranded assets that needs to be mitigated. Appropriate decision-making strategies and effective mitigation are needed to reduce the impact of stranded asset risk. Using the Anaytical Hierarchy Process (AHP), this study tries to analyze the implementation of the PLTU early retirement strategy by taking into account the risk of stranded assets and finding appropriate mitigation in reducing the level of impact of the risk of stranded assets that needs to be implemented by stakeholders. The results show that effective mitigation requires comprehensive planning and stakeholder involvement, which can substantially ease the financial transitions from coal to renewable energy sources. The findings suggest that integrating economic and policy considerations into the early retirement planning of coal-fired power plants is crucial for managing the transition effectively and minimizing potential financial losses. This approach ensures a smoother transition to sustainable energy sources, contributing significantly to both national and global decarbonization goals.

Stranded asset risk assessment on ship investments

The transition towards a low-carbon economy is crucial to achieve the Paris climate goals, but it also presents the risk of stranded assets across various industries. However, existing research has mainly focused on upstream and power sectors, leaving the stranded asset risk of individual assets less understood. This study proposes a real options-based framework for evaluating the stranding risk of carbon-intensive assets. To illustrate its practical application, we apply the framework to a fossil-fuel-powered bulk carrier. The results show that under carbon pricing, the shipowner should expect to bear approximately US$26.5 million of stranded asset risk, which would decrease to US$25.2 million if the ship reduces speed to comply with carbon intensity regulations. We conclude that our framework will enable an adequate assessment of these risks, leading to more practical implications for investment decision-making and supporting climate risk management.

Big oil in the transition or Green Paradox? A capital market approach

In an environment of intensifying pressure to decarbonize, firms in the oil and gas industry have announced initiatives to reduce carbon emissions including ambitious net zero goals. Critics argue that such announcements lack substance and are mainly designed to conceal ongoing investment in fossil fuels. Given the difficulty to validate such announcements, we use capital market data to estimate the transition to a lower carbon state. Our empirical analysis reveals an increased exposure to oil price changes inconsistent with decarbonization but consistent with the Green Paradox - increased investment due to stranded asset risk. The evidence for an increased exposure to clean energy is mixed and clearly not offsetting the increased oil exposure. Canadian companies appear to be leading the transition whereas US and European companies appear to be laggards.

Stranded Asset Risk and Political Uncertainty: The Impact of the Coal Phase-Out on the German Coal Industry

We assess the value of stranded coal-fired power plants in Germany in the light of the critical decision to phase them out by 2038. In a Monte Carlo simulation, the scenarios under consideration (slow decommissioning at the end of the technical lifetime in 2061, the highly probable phase-out by 2038, and an accelerated phase-out by 2030) are additionally assigned distributions to display the uncertainty of future developments. The results show an overall stranded asset value of €2.6 billion given the phase-out by 2038 and an additional €11.6 billion if the phase-out is brought forward by 8 years. This study also describes the impacts of carbon pricing and the feed-in from renewable energy sources on the merit order and eventually the deterioration in economic conditions for hard coal and lignite power plants. Lastly, we discuss the immediate concerns for the share prices of the affected companies and help to close the research gap regarding stranded physical and financial assets.

Bilateral finance organizations and stranded asset risk in coal: the case of Japan

ABSTRACT We evaluate the treatment of climate-related financial risk by bilateral finance organizations and related policymaking bodies involved in the design and implementation of thermal coal power generation technology financing. Our empirical focus is Japanese bilateral financing of thermal coal power generation in the Asia-Pacific. We differentiate between three approaches that organizations can adopt to assess climate change risk. In the first, the organization assesses climate risk and includes consideration of stranded asset risk. In the second, the organization assesses climate risk but does not take into account stranded asset risk. In the third, an organization does not explicitly consider climate risk although it may use alternative criteria for deciding whether to support an investment, such as the broader environmental implications of a proposed project. We review publicly available documents from nine organizations, supplemented by interviews, and find that while some Japanese lending and policy-setting bodies take climate risk into account, none are required to consider the risk that infrastructure investments may become stranded. Our paper contributes to the study of stranded asset risk in two ways. First, while export finance plays a crucial role in thermal coal power plant investments in the Asia-Pacific region, lending by bilateral finance institutions has not been a focus of such research to date. Second, we extend research into stranded asset risk to bilateral finance organizations and related policy bodies. Our approach can be adopted to understand how finance decision-making bodies in other geographic contexts and technology-types assess the risk that assets may become stranded. Key policy insights Bilateral finance organizations are important in infrastructure exports for thermal coal power plant technologies. Japanese bilateral finance organizations and policy bodies take climate risk into account when making lending decisions for thermal coal power plant technologies, but until recently have not explicitly addressed stranded asset risk. Impairments to the asset value may be incurred by the asset holders or the government. This risk should be taken into consideration in investment decisions.

Biomass Availability in Europe as an Alternative Fuel for Full Conversion of Lignite Power Plants: A Critical Review

Biomass has been demonstrated as a capable source of energy to fulfill the increasing demand for clean energy sources which could last a long time. Replacing fossil fuels with biomass-based ones can potentially lead to a reduction of carbon emissions, which is the main target of the EU climate strategy. Based on RED II (revised Renewable Energy Directive 2018/2001/EU) and the European Green Deal, biomass is a promising energy source for achieving carbon neutrality in the future. However, the sustainable potential of biomass resources in the forthcoming decades is still a matter of question. This review aims at estimating the availability of biomass for energy reasons in the EU, and to evaluate its potential to meet the coal power plant capacity of the main lignite-producer countries, including Germany, Poland and Greece. Plants in line with the sustainability criteria of RED II have been selected for the preliminary estimations concerning their full conversion to the biomass power concept. Furthermore, the various barriers to biomass utilization are highlighted, such as the stranded asset risk of a future coal phase-out scenario, biomass supply chain challenges, biomass availability in main lignite-producer EU countries, the existing full conversion technologies, and biomass cost. A variety of challenges in the scenario of lignite substitution with biomass in a plant are investigated in a SWOT (strengths, weaknesses, opportunities, and threats) analysis. Technological risks and issues should be tackled in order to achieve the coal phase-out EU goal, mainly with regard to the supply chain of biomass. In this direction, the development of logistics centers for the centralized handling of biomass is strongly recommended.

Stranded Asset Risk and Political Uncertainty: The Impact of the Coal Phase-out on the German Coal Industry

We assess the value of stranded coal-fired power plants in Germany due to the critical phase-out by 2038. Within a Monte Carlo simulation, the scenarios under consideration (a slow decommissioning at the end of the technical lifetime in 2061, the highly probable phase-out by 2038, and an accelerated phase-out by 2030) are additionally assigned distributions to display the uncertainty of future developments. The results show an overall stranded asset value of €0.4 billion given the phase-out by 2038 and additional €14.3 billion if the phase-out is brought forward by eight years. This study also depicts the impacts of carbon pricing and the feed-in from renewable energy sources on the merit order and eventually the deterioration in economic conditions for hard coal and lignite power plants. Lastly, we illustrate immediate concerns for share prices of affected companies and contributes to closing the research gap between stranded physical and financial assets.

Is there a future for the gas network in a low carbon energy system?

This paper evaluates the potential low carbon opportunities for and challenges to the utilisation and financial performance of Ireland's gas distribution network within a series of low carbon scenarios. There has been a limited amount of academic literature published on the future implications of gas demand on gas networks. This paper takes the unique perspective of assessing the stranded asset risk to a utility operating a gas network in the context of a low carbon energy system. Building on established emissions reduction scenarios, a financial model is developed from an integrated energy system model to understand the financial risks associated with continued investment in gas networks. We find that higher network tariffs are required for consumers in the future to cover network costs, even though gas consumption grows relative to current consumption levels in low carbon scenarios with carbon capture and storage.

Assessing the sources of stranded asset risk: a proposed framework

ABSTRACTLong-term investors, particularly bond investors, do not currently enjoy an efficient framework for assessing where stranded assets (SAs) might arise. Traditional risk categories currently embodied in credit research – Business Risk and Financial Risk – can capture a number of Environmental, Social and Governance (ESG) issues. However, there are some risks that are difficult to assess in this framework, primarily because many ESG categories themselves are not particularly efficient, or even meaningful, as analytical categories. We propose that a better analysis of these risks can be obtained by categorizing what are currently called ESG risks into three specific risk categories: (1) Operational or Management Risk; (2) Climate Risk, primarily related to climate mitigation and adaptation; and (3) Natural Capital Risks, a category intended to capture natural capital depletion, subsidy loss risks, and certain geopolitical risks – risks associated with water resources perhaps being the best example of a Natural Capital Risk. SAs can arise from all three sources, but those arising from Climate and Natural Capital Risk are more likely to be both significant and irreversible.