The Financial Impact of Carbon Emissions on Power Utilities Under Climate Scenarios
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Date
2024-02
Publication Type
Journal Article
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yes
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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.
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published
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Book title
Volume
27 (1)
Pages / Article No.
2450013
Publisher
World Scientific
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Edition / version
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Software
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Date collected
Date created
Subject
Generation of electricity; power utility; fossil fuels; carbon emissions; climate change; emission reduction policies; carbon price scenarios; asset & liability; default probability; Eskom
Organisational unit
03845 - Teichmann, Josef / Teichmann, Josef