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Pricing Climate-Related Risks of Energy Investments

Image of risk scenarios, cash flow and pricing impacts

Project Team

Ram Rajagopal, Soh Young In, John P Weyant, Yasat Berk Manav

Research Overview

Observed Problem: 

  • The impacts of climate change are no longer a distant phenomenon. Yet, owners, operators and investors are mispricing climate risks associated with energy infrastructure investments. That is, the value of “stranded assets” might not be fully reflected in the value of company holdings and investment portfolios.
  • The rising climate risks cannot be managed by rising insurance risks: instead, these risks must be addressed via a fundamental change of climate risk assessment.

Primary Research Objective:

This research develops a framework for pricing the climate resilience of an energy infrastructure project through assessing the value of its required debt and equity investments.

Potential Value to CIFE Members and Practice:

  • Demonstrate how to delineate climate-related risks that are asset-specific and transforms them into financial risks.
  • Estimate 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.
  • Provide a framework to fully leverage advanced data that is becoming widely available, such as asset-level data.

Research provides relevant insights for:

Asset Owners & Operators, Designers, Builders, Other: Consultants, Investors, Insurers

Research and Theoretical Contributions:

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. Differently from previous climate risk assessments, which are mostly on a macroeconomic level, we highlight asset-level granularity in pricing climate risks of energy infrastructure investments.

Industry and Academic Partners:

TBD

Research Updates & Progress Reports

  • Fall 2020-21: building the framework for pricing the climate resilience of an energy infrastructure project
  • Winter 2020-21: advancing the work by demonstrating the framework application on three energy asset cases
  • Spring 2020-21: publishing the findings in the form of a few journal articles

Detailed Research Overview & Progress Updates

  • In, S. Y., Weyant, J. P., & Manav, B. (2020). Pricing Climate-Related Risks of Energy Investments. Available at SSRN 3736415
  • In, S. Y., Weyant, J. P., Manav, B., Venereau, C., & Rodriguez, L. E. (2020). Pricing Climate-Related Risks of Energy Investments: Three Energy Assets. Working paper.

Original Proposal

Proposal 2020-06

Funding Year: 
2021
Stakeholder Categories: 
Owners
Operators/Facility Managers
Designers
Builders