Krach, Florian;
Macrina, Andrea;
Kanter, Ashley;
Hampwaye, Eba;
Hlalukana, Siphokazi;
Rateele, Nchakha Thato;
(2024)
The Financial Impact of Carbon Emissions on Power Utilities under Climate Scenarios.
International Journal of Theoretical and Applied Finance
, 27
(01)
, Article 2450013. 10.1142/S0219024924500134.
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Abstract
Power utilities, especially those that generate electricity by burning fossil fuels, produce significant amounts of carbon emissions. Mitigation of CO2-equivalent (CO2e) emissions can be achieved by replacing power plants with renewable power installations and by adopting carbon-sequestration technologies. Physical upgrades are expensive, but carbon taxes, or the purchase of certificates and allowances on a voluntary carbon market, can be costly, too. Carbon costs may increasingly become a threatening liability for power utilities, eating into profits and undermining the financial viability of emission-intensive electricity generation. Thus, we consider an asset-and-liability, structural firm model to investigate the creditworthiness of a generic power utility. The utility's assets dynamics are driven by the financial returns generated from the sold electricity for a set tariff which is modeled by a simple stochastic process. The liabilities not only depend on fuel, running, and depreciation costs, but also on the costs of CO2e emissions. As a case study, we consider Eskom, the South African power utility. We show the evolution of Eskom's default probability under various fuel mix plans and technologies (as per SA's Integrated Resources Plan (IRP) 2019), and under the Network for Greening the Financial System (NGFS) carbon price scenarios. The obtained results and insights present a trying path ahead, especially for carbon-intensive power utilities.
| Type: | Article |
|---|---|
| Title: | The Financial Impact of Carbon Emissions on Power Utilities under Climate Scenarios |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1142/S0219024924500134 |
| Publisher version: | https://doi.org/10.1142/S0219024924500134 |
| Language: | English |
| Additional information: | This is an Open Access article published by World Scientific Publishing Company. It is distributed under the terms of the Creative Commons Attribution 4.0 (CC BY) License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited. |
| Keywords: | Generation of electricity; power utility; fossil fuels; carbon emissions; climate change; emission reduction policies; carbon price scenarios; asset & liability; default probability; Eskom |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Maths and Physical Sciences > Dept of Mathematics |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10200788 |
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