Pricing Climate-Related Risks of Energy Investments

46 Pages Posted: 17 Dec 2020 Last revised: 11 Sep 2021

See all articles by Soh Young In

Soh Young In

Global Projects Center, Stanford University; Precourt Institute for Energy, Stanford University

John Weyant

Stanford University

Berk Manav

Stanford University - Department of Civil and Environmental Engineering

Date Written: November 24, 2020

Abstract

This paper presents a framework for pricing the climate resilience of an energy infrastructure project through assessing the value of its required debt and equity investments. Integrating climate scenarios into an asset valuation model provides useful and specific insights for risk management, but there is a lack of academic and market tools that effectively address this need. The critical barrier is that climate-related risks (physical and transition) are typically indirect variables in the cash flow calculation, and they should be computed based on the direct variables such as revenue, capital expenditures (CAPEX), operating expenses (OPEX), and financing costs. The implementation of this framework shows how to delineate climate-related risks that are asset-specific and transforms them into financial risks. Using cash flow simulation and scenario analysis, it estimates an energy infrastructure asset’s probability of default due to climate-related risks and the size and timing of the losses for any given default. To demonstrate the framework's application, we simulate the price climate-related risks of a utility-scale electricity generation facility (i.e., a downstream energy asset) powered by natural gas.

Keywords: climate risk assessment, financial impact assessment, stranded assets, project finance, cash flow modelling, scenario analysis, energy infrastructure investment, climate resilience

Suggested Citation

In, Soh Young and Weyant, John and Manav, Berk, Pricing Climate-Related Risks of Energy Investments (November 24, 2020). Available at SSRN: https://ssrn.com/abstract=3736415 or http://dx.doi.org/10.2139/ssrn.3736415

Soh Young In (Contact Author)

Global Projects Center, Stanford University ( email )

473 Via Ortega, Suite 242
Stanford University
Stanford, CA 94305
United States

HOME PAGE: http://https://gpc.stanford.edu/

Precourt Institute for Energy, Stanford University ( email )

473 Via Ortega, Suite 324
Stanford University
Stanford, CA 94305
United States

HOME PAGE: http://https://energy.stanford.edu/

John Weyant

Stanford University ( email )

Stanford, CA 94305
United States

Berk Manav

Stanford University - Department of Civil and Environmental Engineering ( email )

CA
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
76
Abstract Views
421
rank
388,224
PlumX Metrics