THE FINANCIAL IMPACT OF CARBON EMISSIONS ON POWER UTILITIES UNDER CLIMATE SCENARIOS

Florian Krach (), Andrea Macrina, Ashley Kanter (), Eba Hampwaye (), Siphokazi Hlalukana () and Nchakha Thato Rateele ()
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Florian Krach: Department of Mathematics, Eidgenössische Technische Hochschule, Rämistrasse 101, 8092 Zurich, Switzerland
Andrea Macrina: Department of Mathematics, University College London, Gower Street, London WC1E 6BT, UK3African Institute of Financial Markets & Risk Management, Leslie Commerce Building, University of Cape Town, Rondebosch 7701, Cape Town, South Africa
Ashley Kanter: Riskworx (Pty) Ltd., 138 West Street, Sandown, Sandton 2031, South Africa
Eba Hampwaye: African Institute of Financial Markets & Risk Management, Leslie Commerce Building, University of Cape Town, Rondebosch 7701, Cape Town, South Africa
Siphokazi Hlalukana: African Institute of Financial Markets & Risk Management, Leslie Commerce Building, University of Cape Town, Rondebosch 7701, Cape Town, South Africa
Nchakha Thato Rateele: African Institute of Financial Markets & Risk Management, Leslie Commerce Building, University of Cape Town, Rondebosch 7701, Cape Town, South Africa

International Journal of Theoretical and Applied Finance (IJTAF), 2024, vol. 27, issue 01, 1-32

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.

Keywords: Generation of electricity; power utility; fossil fuels; carbon emissions; climate change; emission reduction policies; carbon price scenarios; asset & liability; default probability; Eskom (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1142/S0219024924500134

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