Pricing Climate-Related Risks of Energy Investments

In, Soh Young, John P. Weyant, and Berk Manav. (2022) "Pricing Climate-Related Risks of Energy Investments." Renewable & Sustainable Energy Reviews. 154. 111881.

46 Pages Posted: 17 Dec 2020 Last revised: 18 Nov 2021

See all articles by Soh Young In

Soh Young In

Korea Advanced Institute of Science & Technology (KAIST); Stanford University - School of Engineering

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, operating expenses, 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 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). In, Soh Young, John P. Weyant, and Berk Manav. (2022) "Pricing Climate-Related Risks of Energy Investments." Renewable & Sustainable Energy Reviews. 154. 111881., Available at SSRN: https://ssrn.com/abstract=3736415 or http://dx.doi.org/10.2139/ssrn.3736415

Soh Young In (Contact Author)

Korea Advanced Institute of Science & Technology (KAIST) ( email )

291 Daehak-ro, Yuseong-gu
Daejeon, 34141
Korea, Republic of (South Korea)

Stanford University - School of Engineering ( email )

Stanford, CA 94305-9025
United States

John Weyant

Stanford University ( email )

Stanford, CA 94305
United States

Berk Manav

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

CA
United States

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