Pricing Climate Risks of Energy Investments: A Comparative Case Study

54 Pages Posted: 8 Apr 2021 Last revised: 9 Jun 2021

See all articles by Soh Young In

Soh Young In

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

Berk Manav

Stanford University - Department of Civil and Environmental Engineering

Clothilde Venereau

Stanford University

Luis Enrique Cruz Rodriguez

Stanford University

John Weyant

Stanford University

Date Written: February 4, 2021

Abstract

In, Weyant and Manav (2020) propose a framework that assesses material financial impacts from climate change and a low-carbon transition on energy infrastructure investments. This study demon-strates the application of the framework using three downstream energy assets: natural gas, coal, and solar photovoltaic power plants. We identify physical and transition risks that an asset is highly exposed to with its asset type, geographic location, time frame, and financing structure, and build highly-likely climate risk scenarios. We then project an energy asset’s cash flow under multiple scenarios and investigate whether and how these scenarios would affect the asset’s debt and equity investments. While extant climate risk assessments are mostly at sovereign, industry, or portfolio levels, this study focuses on infrastructure assets. Instead of estimating net present value (NPV), we estimate an energy asset’s probability of default due to climate risks and the size and time of the losses by the given default using debt service coverage ratio (DSCR). Lastly, this comparative case study also shows how the values of investment would vary across energy assets.

Keywords: Climate-Related Financial Risks; Energy Investment; Stranded Assets; Cash Flow Analysis; Pro-ject Finance; Debt Service Coverage Ratio

Suggested Citation

In, Soh Young and Manav, Berk and Venereau, Clothilde and Cruz Rodriguez, Luis Enrique and Weyant, John, Pricing Climate Risks of Energy Investments: A Comparative Case Study (February 4, 2021). Available at SSRN: https://ssrn.com/abstract=3779228 or http://dx.doi.org/10.2139/ssrn.3779228

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

Berk Manav

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

CA
United States

Clothilde Venereau

Stanford University ( email )

Stanford, CA 94305
United States

Luis Enrique Cruz Rodriguez

Stanford University ( email )

Stanford, CA 94305
United States

John Weyant

Stanford University ( email )

Stanford, CA 94305
United States

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