STRANDED ASSETS AND RENEWABLES - How the energy transition aff ects the value of energy reserves, buildings and capital stock - IRENA
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STRANDED ASSETS AND RENEWABLES How the energy transition affects the value of energy reserves, buildings and capital stock WORKING PAPER based on global REmap analysis JULY 2017
© IRENA 2017 Unless otherwise stated, material in this publication may be freely used, shared, copied, reproduced, printed or stored, provided that appropriate acknowledgement is given of IRENA as the source and copyright holder. Material in this publication that is attributed to third parties may be subject to separate terms of use and restrictions, and appropriate permissions from these third parties may need to be secured before any use of such material. ISBN 978-92-9260-012-9 (PDF) Citation IRENA (2017), “Stranded assets and renewables: how the energy transition affects the value of energy reserves, buildings and capital stock”, International Renewable Energy Agency (IRENA), Abu Dhabi, www.irena.org/remap About IRENA The International Renewable Energy Agency (IRENA) is an intergovernmental organisation that supports countries in their transition to a sustainable energy future and serves as the principal platform for international co-operation, a centre of excellence, and a repository of policy, technology, resource and financial knowledge on renewable energy. IRENA promotes the widespread adoption and sustainable use of all forms of renewable energy, including bioenergy, geothermal, hydropower, ocean, solar and wind energy in the pursuit of sustainable development, energy access, energy security and low-carbon economic growth and prosperity. Acknowledgements The report has benefited significantly from expert input provided by Jakob Thomae and Christopher Weber (2° Investing Initiative), Julia van Huizen, Carsten Jung, Matthew Scott (Bank of England), Jeremy McDaniels (United Nations Environment Programme Inquiry into the Design of a Sustainable Finance System), Harald Hecking and Theresa Wildgrube (ewi Energy Research & Scenarios), Marius Backhaus, Martha Ekkert and Martin Schöpe (Federal Ministry for Economic Affairs and Energy of Germany), Laura Cozzi and Timur Gül (International Energy Agency). IRENA colleagues Álvaro López-Peña, Sakari Oksanen, Gayathri Prakash, Michael Taylor, Nicholas Wagner and Henning Wüster also provided valuable comments. John Carey (Consultant) was responsible for technical editing. IRENA is grateful for the generous support of the Federal Ministry for Economic Affairs and Energy of Germany, which provided financial support. Contributors: Ben Caldecott (Smith School of Enterprise and the Environment, University of Oxford), Deger Saygin, Jasper Rigter and Dolf Gielen (IRENA) For further information or to provide feedback, please contact the REmap team: REmap@irena.org Disclaimer This publication and the material herein are provided “as is”. All reasonable precautions have been taken by IRENA to verify the reliability of the material in this publication. However, neither IRENA nor any of its officials, agents, data or other third-party content providers provide a warranty of any kind, either expressed or implied, and they accept no responsibility or liability for any consequence of use of the publication or material herein. The information contained herein does not necessarily represent the views of the Members of IRENA. The mention of specific companies or certain projects or products does not imply that they are endorsed or recommended by IRENA in preference to others of a similar nature that are not mentioned. The designations employed and the presentation of material herein do not imply the expression of any opinion on the part of IRENA concerning the legal status of any region, country, territory, city or area or of its authorities, or concerning the delimitation of frontiers or boundaries.
CONTENTS
FIGURES ......................................................................................................................................................................... 4
TABLES ........................................................................................................................................................................... 4
BOXES ............................................................................................................................................................................. 4
ABBREVIATIONS ...........................................................................................................................................................4
EXECUTIVE SUMMARY ................................................................................................................................................. 5
The impact on stranded assets of Delayed Policy Action .............................................................................. 5
Who will be most affected? .................................................................................................................................. 6
What do these findings imply for the various stakeholders? ....................................................................... 8
Are there ways to minimise stranded assets while achieving decarbonisation targets? ..................... 10
Action Areas ........................................................................................................................................................... 10
1. STRANDED ASSETS: ORIGINS, CONCEPTS, AND DEFINITIONS .................................................................12
1.1 Introduction .....................................................................................................................................................12
1.2 Defining stranded assets ..............................................................................................................................13
1.3 Evolution of stranded assets ....................................................................................................................... 14
2. RESULTS.................................................................................................................................................................. 23
2.1 Impact on stranded assets of Delayed Policy Action ...........................................................................23
2.2 Who will be affected most?.........................................................................................................................23
2.3 What do these findings imply for the various stakeholders?..............................................................29
2.4 Are there ways to minimise stranded assets while achieving decarbonisation targets? ............. 32
3. ACTION AREAS ..................................................................................................................................................... 33
3.1 Availability of finance .................................................................................................................................. 33
3.2 Curtailing investment in upstream energy ............................................................................................. 33
3.3 Coal phase-out .............................................................................................................................................. 33
3.4 Energy efficiency retrofits and higher standards for new buildings ................................................. 34
3.5 Improving the efficiency of industry ........................................................................................................ 34
3.6 Stronger policy signals ................................................................................................................................ 34
REFERENCES .............................................................................................................................................................. 35
ANNEX A. METHODOLOGY, ASSUMPTIONS AND DATA SOURCES ............................................................... 40
REFERENCES FOR ANNEX A .................................................................................................................................. 44
WO RKI N G PAPE R 3FIGURES
Figure 1: Stranded assets by sector with REmap and Delayed Policy Action ................................................ 6
Figure 2: Stranded assets by sector and country with REmap .......................................................................... 7
Figure 3: Stranded assets by sector and fuel type with REmap .......................................................................8
Figure 4: Estimated stranded oil, gas and coal reserves (percent of global total) ..................................... 18
Figure 5: Stranded assets by sector with REmap and Delayed Policy Action ............................................ 23
Figure 6: Stranded assets by sector and country with REmap ....................................................................... 25
Figure 7: Stranded assets by sector and fuel type with REmap .................................................................... 26
Figure 8: Stranded assets by region/country – with REmap and Delayed Policy Action.......................... 27
Figure 9: Carbon lock-in through power generation assets, 2016–50 ........................................................... 28
TABLES
Table 1: Studies reviewed that relate to stranded assets ....................................................................................15
BOXES
Box 1: Stranded assets and energy efficiency investments in buildings ....................................................... 22
Box 2: The significance of technology lock-in: power sector case ................................................................. 27
ABBREVIATIONS
°C degrees Celsius mbd million barrels per day
bln billion n. d. no date
CCS carbon capture and storage OECD Organisation for Economic Co-operation
and Development
CO₂ carbon dioxide
PAYS Pay As You Save
EU European Union
REmap Renewable energy roadmap analysis by
GBPN Global Buildings Performance Network IRENA
Gt gigatonnes trln trillion
GW gigawatt UK United Kingdom
IRENA International Renewable Energy Agency USD United States Dollar
m² square metres VaR value at risk
4 S TRAN DED ASSETS A ND R E NEWA B L E SEXECUTIVE SUMMARY
The objective of this working paper is to examine the including global, regional and country studies. As of
potential magnitudes of asset stranding in the power mid-2017 the REmap programme has expanded to 70
generation, upstream, industry and building sectors countries, accounting for 85% of world energy use.
(i. e. residential and commercial) in order to realise a
decarbonisation of the global energy system in line Based on the REmap 2050 analysis, this working
with the Paris Agreement. Asset stranding results paper examines two cases. The first case relates
when assets have suffered from unanticipated or to accelerated renewables and energy efficiency
premature write-downs, devaluations or conversion deployment from today until 2050 which will
to liabilities (Caldecott et al., 2013, p. 7). The idea of deliver emissions reductions that have a two-out-
stranded assets, created by physical climate change of-three chance of maintaining a global temperature
impacts and the transition to a low carbon economy, change below two degrees Celsius (2°C) above
has risen considerably on the agenda in recent years. pre-industrial levels (this case is called “REmap”).
The process of asset stranding and its implications Under the REmap case, a carbon emission budget
are relevant to a wide range of investors, companies, of 880 gigatonnes (Gt) CO₂ has been defined for the
policy makers and regulators. period 2015–50. This includes fossil fuel and other
(e. g. land use, industrial process) emissions. This case
The stranded asset analysis helps us to understand assumes action will commence soon through new
whether the scale of asset stranding will differ in policy initiatives.
the event that the policy action to achieve the Paris
Agreement is delayed. The analysis contained in this The second case assumes a business-as-usual
report is part of a broader study, undertaken by the scenario that continues until 2030 (represented by
International Renewable Energy Agency (IRENA) and the Reference Case here). However, after 2030 the
commissioned by the German government, the latter deployment of renewables and energy efficiency
of which holds the 2017 G20 Presidency. Its intention accelerates to ensure that the global energy system
is to inform the G20 Energy and Climate Working remains within the same emission budget by 2050
Groups (IEA & IRENA, 2017). (“Delayed Policy Action”). Comparing these two
cases provides an understanding of whether or
This working paper furthers existing analyses of not the scale of asset stranding will differ should
stranded upstream fossil fuel assets and undertakes policy action to achieve the objectives of the Paris
a new analysis of asset-stranding downstream, Agreement be delayed.
specifically in power generation, buildings and
industry, three large sectors that are responsible for
approximately three-quarters of today’s direct global The impact on stranded assets of
energy-related carbon dioxide (CO₂) emissions. Delayed Policy Action
Refined methodologies are applied to estimate the
potential magnitudes of asset stranding in these The seriousness of early action is hard to
three sectors, as well as the global upstream fossil overemphasise. With delayed action, the chance
fuel production sector by 2050. These stem from of having stranded assets will increase. The main
accelerated renewable energy and energy efficiency objective of this paper, therefore, is to estimate the
deployment when using IRENA’s REmap analysis.¹ extent to which delayed policy action would impact
The REmap programme aims to assess technology stranded assets. Although beyond the scope of this
options for and scenarios of accelerated renewable paper, if action is delayed, total investment costs will
energy development in terms of technical and rise and costly negative emission technologies will be
economic potentials through a series of activities, required to limit planetary warming.
1 Further details on IRENA’s REmap analysis can be found at http://www.irena.org/remap/
WO RKI N G PAPE R 5Figure 1: Stranded assets by sector with REmap and Delayed Policy Action
Total
Buildings
Upstream
Power
Industry
0 3 6 9 12 15 18 21
Cumulative stranded assets in 2015–2050 (USD trln)
Delayed policy action REmap
Source: IRENA analysis
Delayed Policy Action would result in significant asset Upstream energy is the second largest sector
stranding in comparison to the REmap case, where in terms of stranded assets, at approximately
accelerated deployment begins now. The total value USD 7 trln under Delayed Policy Action, USD 3 trln
of stranded assets across upstream energy, power more than in REmap. Large capital expenditures in
generation, industry and buildings under Delayed upstream infrastructure until 2030 under Delayed
Policy Action is found to double to USD 20 trillion Policy Action would result in significant stranding in
(trln), compared to USD 10 trln in the REmap case the period after 2030.
(Figure 1). To put this into context, USD 20 trln is
approximately 4% of global wealth in 2015 (estimated The undiscounted value of fossil fuel producer assets
at USD 250 trln, according to Credit Suisse, 2015). is expected to fall to an estimated USD 10.2 trln under
REmap and USD 7.1 trln under Delayed Policy Action,
with crude oil production decreasing from 100 million
Who will be most affected? barrels a day (mbd) in 2015 to 31 mbd in the REmap
case in 2050 and 2 mbd in the Delayed Policy Action
The sector that experiences the largest amount of case in 2050. The production figure for oil is lower
asset stranding on a global scale is buildings, with in the Delayed Policy Action case than in the REmap
approximately USD 10.8 trln stranded under Delayed case as there is a need to make up for higher fossil fuel
Policy Action. This is double the amount in the Remap related emissions pre-2030 and emissions will need
case. The low stock turnover rate of buildings means to decline drastically after that time. The stranded
that stranded assets (i. e. buildings with an inefficient assets would represent 45–85% of the assumed
building envelope, equipment, among others) cannot valuation of today’s oil upstream producers. This level
be avoided, even if all new buildings are constructed to of oil supply, however, could pose a challenge since
the highest of standards in terms of energy efficiency the technical substitution solutions are lacking in key
and with integrated renewable energy systems. This oil markets, such as petrochemicals and parts of the
is especially true in the United States and Western transportation sector.
Europe where the growth in building stock is slow
and new buildings account only for a marginal share
of the total stock.
6 S TRAN DED ASSETS A ND R E NEWA B L E SFigure 2: Stranded assets by sector and country with REmap
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
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Buildings Upstream Power Industry
Source: IRENA analysis
Power generation is the third largest sector in terms REmap case. In the European Union, Japan and the
of stranded assets, at USD 1.9 trln under Delayed United States, the value stranded is concentrated in
Policy Action, which is twice as much as the REmap buildings, with more than 95% of total value stranded
amount of USD 0.9 trln. The build-out of coal power under REmap being from that sector. This reflects the
plants in the developing world with Delayed Policy fact that these are advanced economies with well-
Action has a large impact: under business as usual, developed property markets, extensive mortgage
the coal-fired capacity would be greatly expanded liabilities and high average property values. Buildings
and would need to be stranded after 2030 to meet are also, on average, older and there are very low
decarbonisation targets. In comparison, under levels of building turnover (i. e. new buildings).
REmap, an average 40 gigawatts of coal capacity
would be stranded each year between 2015 and In China and India, power generation would have the
2050 worldwide. Average gas capacity that would largest share of total stranded assets at between 25%
be stranded between 2015 and 2050 would be and 45% of total value. This reflects the large exposure
approximately 20 gigawatts a year worldwide. these countries have to coal-fired power plants that
are relatively new and not fully depreciated. These
Stranded industrial assets with Delayed Policy power plants would absorb the brunt of efforts to
Action are estimated at USD 740 billion (bln), three decarbonise the power sector.
times higher than that estimated under REmap
(USD 240 bln). Under REmap, stranded industrial Countries such as Brazil and China would experience
assets between 2015 and 2050 would have a value of significant stranding of industrial assets. This would
USD 7 bln a year on average, an amount that could be indicate that they have large and inefficient industrial
compensated through lower energy bills if industry sectors, particularly in heavy industry.
were to achieve a 1.2% a year improvement in energy
efficiency. Significant stranding of upstream energy assets
would occur in countries that have large oil, gas and
There are very large differences in the total impact coal reserves. Australia, Brazil, Canada, Indonesia,
and sectoral distributions of anticipated stranded Mexico, the Russian Federation, Saudi Arabia and
assets across countries and regions (Figure 2). South Africa would have the largest proportion of
This is true under the Delayed Policy Action and stranded upstream assets.
REmap cases, although here the focus is only on the
WO RKI N G PAPE R 7Figure 3: Stranded assets by sector and fuel type with REmap
6 000
5 000
USD bln, cumulative
4 000
3 000
2 000
1 000
0
Upstream Power Buildings Industry
Oil Gas Coal
Source: IRENA analysis
Note: The total value of the bars represents stranded assets in each sector. For each, a breakdown by fuel type is provided.
This refers to the total volume of stranded assets related to that fossil fuel capacity installed to produce fuels or generate heat
and electricity from those fuels.
The clear majority of stranded oil assets would occur would be a cost-effective way in which to achieve
upstream, rather than in power generation, buildings or decarbonisation. Furthermore, it has the potential to
industry. Oil is primarily used in transport. As ultra-low contribute to the avoidance of “carbon lock-in”.
emissions and electric vehicles reach maturity,
projected oil demand will decrease, reducing prices,
and thus also lessening the value of oil reserves. What do these findings imply for
Compared to the demand for oil in transport, demand the various stakeholders?
from power generation, heating in buildings, and
industry is minor. Developing countries, in particular, are able to prevent
the amount of assets that would be stranded by
Gas assets would be stranded across each of the accelerating policy action today. Delaying action and
four sectors, the value of which would be large in prolonging business as usual will exacerbate efforts
buildings. Those assets would be stranded based on of future course corrections, resulting in significantly
the replacement of the gas heating systems that are more asset stranding. Developed countries with low
widely used – particularly in advanced economies in ambition plans for decarbonisation also are affected
the Northern Hemisphere – with systems powered by this issue and should, therefore, seriously consider
by electricity based on renewables. Although gas is increasing their levels of ambition to avoid stranded
cleaner than oil and coal, it remains incompatible with assets in the future, as well as the ensuing negative
the required levels of decarbonisation. As a result, economic impacts.
the REmap case shows significant gas stranding
upstream and in gas-fired power generation. In addition to these macro variances among fossil
fuel sectors and countries, different stakeholders
Coal assets are also stranded across each of the four also will be affected by stranded assets in diverse
sectors, although the sector that would have by far and potentially significant ways. The four key groups
the largest amount is power generation. Coal-fired of stakeholders that will be affected are companies,
power generation is a major source of direct CO₂ investors, governments and workers.
emissions (approximately 25% of the global total).
Stranded coal-fired power assets, however, have only
modest value. Since coal plants also comprise high
levels of carbon emissions, stranding these assets
8 S TRAN DED ASSETS A ND R E NEWA B L E SCompanies The Bank of England and other central banks have, at
the highest levels, demonstrated sustained interest in
Corporations, whether listed, state-owned or non- stranded assets (Bank of England, 2015). This interest
listed, already suffer from holding stranded assets has sent a signal to the market, encouraging operations
in key markets. The challenges that companies within the financial institutions that were not previously
face include their often short-term focus and the engaged in the issue to become more so.
issue of sunk costs. Endemic short-termism is well
documented, particularly among listed companies In addition to these developments, new products
that report on a quarterly basis. A short-term outlook are increasingly being launched to address
makes it difficult for companies and their executives stranded assets. They include indices that are
to take pre-emptive action to avoid asset stranding weighted away from the risk of stranded assets
(Generation Foundation, 2013). (Fossil Free Indexes, n. d.), exchange traded funds
that employ such indices (State Street Global
Moreover, companies may not act promptly in Advisors, 2016) and credit ratings that integrate
the light of emerging signals about forthcoming stranded asset risks (Standard & Poor’s, 2014;
stranded assets. There is a well-documented Center for International Environmental Law, 2015).
behavioural tendency to continue with activities
already invested in, despite the fact that such Government liabilities and reduced
activities may not be economically rational tax take
(Kahneman and Tversky, 1979). In the case of asset
stranding, these sunk costs could be a very significant Current or planned investments made directly
barrier to companies that act in accordance with by government departments or via state-owned
decarbonisation policies and goals. Companies could banks or investment vehicles could be at risk from
be wedded to previous strategies (their sunk costs), stranded assets. Governments could also have
particularly when it may be economically irrational indirect exposure to such investments through loan
to do so. This could exacerbate the stranded assets guarantees or other contingent liabilities. Moreover,
issue as companies “throw good money after bad” important tax revenues that depend on the economic
and further delay action due to “loss aversion”, activities based on these assets are at stake.
despite the illogicality. There is also the potential
that companies will actively lobby to reduce the Governments that are highly dependent on revenue
scale and pace of the low carbon transition. from fossil fuels are likely to be the most significantly
affected, and delayed action will potentially make the
Financial institutions process of adjustment difficult. The ability to borrow
from capital markets could be curtailed, with credit
Potential financial loss from stranded assets may be rating downgrades occurring as the implication of
very significant, particularly in the event of delayed fiscal impacts becomes clearer. In contrast, timely
action. Many segments of the investment chain action to diversify the tax base should reduce the
in mature and developing capital markets will be risk of fiscal shocks.
affected in various ways by stranded assets.
The issue of stranded assets is compelling, not
Financial institutions, however, share common only for existing fossil fuel producers but also for
characteristics that challenge risk accounting, such as countries that are considering and developing which
stranded assets that are novel, non-linear and medium- sectors to promote and develop. The development
to-long term (Kay, 2012; Thomä & Chenet, 2017). model led by fossil fuel exports may no longer be
These include endemic short-termism, misaligned viable for such countries.
incentives, and misinterpretations of fiduciary duty
(Kay, 2012; Carney, 2015). These issues can make it
challenging for many financial institutions to engage
with stranded assets and the broader topics that
relate to environmental change.
WO RKI N G PAPE R 9Workers There are also significant co-benefits of acting early
that are not indicated here, but which are captured
Decarbonisation is expected to strand assets in in IRENA’s global REmap analysis which this working
carbon-intensive sectors, and the scale of such asset paper is also a part of (IEA and IRENA, 2017). There
stranding would be significantly higher were policy is the avoided cost of climate damage from warming
action delayed. This issue can potentially destabilise above two degrees Celsius (2°C), which is estimated
low-carbon transitions and hinder the realisation at USD 1.5–3.3 trln a year in 2050, according to
of Nationally Determined Contributions. The mere IRENA’s REmap analysis. There are also avoided
threat of stranded assets could cause groups that costs from improved human health as a result of
are potentially affected to slow down or block low- reduced air pollution from road transport and power
carbon transitions. In particular, the most active generation. These avoided costs are estimated at
of such groups could be those that would lose USD 2.3–6.5 trln a year in 2050. The human welfare
employment because of asset stranding. National benefits offset the increased energy system costs
governments and other stakeholders, however, can from the additional investments in low-carbon
and should avoid such opposition through good technologies and the stranded assets. There are
transition planning. other potential benefits, for example, in terms of
environmental impacts and agricultural productivity.
The sectors most likely to generate substantial Quantifying and highlighting these benefits to
political economy “frictions” from asset stranding are stakeholders – especially to the broader society –
those that are large employers, especially where such can assist in creating the necessary buy-in to enable
employment is highly concentrated. Upstream fossil the expediting of action to avoid stranded assets.
fuel production and manufacturing are two sectors
that share these characteristics. Stranded building
assets are less likely to create labour disputes, Action Areas
although they are more likely to generate concern
among property owners. The following high-level action areas are proposed
for consideration by policy makers. These are based
The reallocation of resources and transition assistance on findings from this IRENA analysis.
subsidies for those individuals and communities
affected by climate change and related policies may Availability of finance
facilitate a just transition (Caldecott et al., 2016;
Newell and Mulvaney, 2013). These approaches are The investment demands for energy transition are
more likely to be implemented in developed countries, significant. Where risk is not adequately priced,
where citizens tend to demand higher relocation financial markets should make the necessary
costs and where stronger unions call for increased corrections. Governments should play a role through
settlements for loss in earnings (Funk, 2014). The the use of particular instruments, tailored to specific
provision of adequate support for sectors that are country and sector needs.
losing out in a low-carbon future and the generation
of employment opportunities in low-carbon sectors, Curtailing investment in upstream
particularly in developing countries, are critical to
ensuring a just transition. Upstream energy investments face significant
stranding under a Delayed Policy Action pathway.
Almost USD 7 trln would be stranded, with a significant
Are there ways to minimise share of those stranded upstream assets taking place in
stranded assets while achieving the oil industry. Reducing upstream investments today
will prove to be an important measure in reducing
decarbonisation targets? the total value of stranded assets in the future. The
To avoid asset stranding caused by devastating most direct way to influence today’s investments
physical climate change impacts, polluting assets will be for governments to re-evaluate their own
should be stranded before they emit the emissions upstream investments, as well as the licensing of listed
that will irreversibly alter the climate. Fortunately, companies that undertake such investments within
stranding assets to ensure timely decarbonisation their jurisdictions. Policy makers and regulators can
can be done with significantly less cost if acted upon also improve the transparency of the stranded asset
sooner rather than later. risks of such investments, with a view to encouraging
10 S TRAN DED ASSETS A ND R E NEWA B L E Sfinancial institutions to place pressure on companies to Improving the efficiency of industry
reduce upstream investments.
Industry can benefit from the cost savings that derive
Coal phase out from energy efficiency improvements. These savings
will provide incentives for industry retrofits, aligned
While the total value of stranded coal-fired power with decarbonisation pathways. Policy makers should
generation assets would be significantly lower than further encourage industry to invest in retrofits and
the value of assets stranded in the other sectors energy efficiency improvements by applying tax
considered here, coal has an out-sized impact on incentives, regulatory standards and concessional
decarbonisation. Without phasing out coal-fired finance. Governments should also invest in the
power plants, achieving a carbon budget that limits facilitation of infrastructure for industrial carbon
the rise in global temperatures to less than 2°C is capture and storage (CCS), particularly in relation to
difficult, since progress in the deployment of CO₂ industrial processes that generate flue gas with high
capture and storage for coal-fired power plants has CO₂ concentration.
been lagging and a massive ramp-up is unlikely in
the near future. The phasing out of coal sooner rather Stronger policy signals
than later also will enable a reduction in the scale and
pace of required decarbonisation in other sectors. For various reasons, companies and investors
Early action on coal also will reduce the total amount are likely not to act in the light of future stranded
of stranded coal assets. asset risk. As a result, a case can be made whereby
policy makers should provide stronger signals
Energy efficiency retrofits and higher and foreground these issues more clearly for
standards for new buildings stakeholders in an effort to prevent companies and
investors from throwing good money after bad
Buildings, particularly in developed economies, and further delaying action due to loss aversion,
generate by far the largest quantity of stranded thus increasing the amount of stranded assets with
assets. Policies to enable the deep energy efficiency delayed action.
retrofits of residential and commercial properties
in these countries are essential. Furthermore, Such policy signals will need to be stronger than
introducing these mechanisms as soon as possible what standard economic models suggest in order
will yield significant benefits. Pay As You Save to take account of this phenomenon. They should
(PAYS) schemes, tax incentives, energy performance include higher carbon prices and larger economic
regulations and the provision of concessional finance incentives or tighter regulation. Regulators should
have each demonstrated success in some jurisdictions ensure transparency on such issues for decision
for energy efficiency retrofits, providing valuable case makers, ensuring that investors have access to the
studies for policymakers. In developing economies, necessary information when determining which
where the quantity of new build relative to the existing companies to invest in. The same would apply
building stock will be much higher between now and for consumers when deciding which products
2050 than in developed economies, adopting suitably to purchase. Company directors should also be
ambitious building standards and regulations for new responsible for systematically taking these issues
builds will be crucial. into consideration.
WO RKI N G PAPE R 111. STRANDED ASSETS: ORIGINS,
CONCEPTS, AND DEFINITIONS
1.1 Introduction • Just Transition – Reducing the negative
consequences of stranded assets created as
This working paper examines the potential societies transition to more environmentally
magnitude of asset stranding in the energy, sustainable economic models by finding ways to
industrial and property sectors on a worldwide basis, effectively address unemployment, lost profits and
specifically as a result of accelerated renewable reduced tax income that are associated with asset
energy and energy efficiency deployment. This stranding (Caldecott, 2015).
analysis will provide an understanding of whether
or not and by how much the delays of policy action • Management – Internalising the risk of stranded
to fulfil the Paris Agreement will affect the amount assets in corporate strategy and decision
of assets put out of action by energy transition. making, particularly in carbon-intensive sectors
The analysis contained herein is part of a broader susceptible to the effects of societal action
decarbonisation study that has been undertaken by on climate change (Rook and Caldecott, 2015;
the International Renewable Energy Agency (IRENA) Carbon Tracker Initiative, 2013; Ansar, Caldecott
and commissioned by the German government – and Tibury, 2013).
the latter of which holds the 2017 G20 Presidency.
It intends to inform the G20 Energy and Climate • Carbon lock-in – Keeping track of progress
Working Groups (IEA and IRENA, 2017). towards emission reduction targets and
understanding how “committed emissions”³ should
The issue of stranded assets, created by climate influence decarbonisation plans developed by
change and by the transition to a low-carbon governments, as well as companies and investors
economy, has escalated considerably on the (Pfeiffer et al., 2016; Davis and Socolow, 2014;
international agenda in recent years.² Asset stranding Davis, Caldeira and Matthews, 2010).
and its implications are relevant to a wide range of
investors, companies, policy makers and regulators, These are critically important topics that will likely
particularly in the following areas: increase in significance as societies transition towards
a low-carbon economy. While much has been written
• Investment risk – Managing the exposure of about stranded assets in a short period, however,
investments to climate change-related risks across there remain significant gaps in the literature. Much of
sectors, geographies and asset classes so that the existing research focuses on asset stranding facing
financial institutions can avoid stranded assets listed upstream fossil fuel producers – particularly
(Financial Stability Board, 2015; Caldecott, Dericks international oil companies listed on the New
and Mitchell, 2013; Generation Foundation, 2013; York and London stock exchanges – and how their
Carbon Tracker Initiative, 2011; Caldecott, 2011). fossil fuel reserves are incompatible with required
carbon budgets (Carbon Tracker Initiative, 2011;
• Financial stability – Financial stability implications Carbon Tracker Initiative, 2013).⁴ This focus on listed
of stranded assets and what this means for upstream oil companies provides a limited perspective
macro- and micro-prudential regulations and of the potential impact of stranded assets, as these
financial conduct (Kruitwagen, MacDonald-Korth companies own less than 5% of total global oil and
and Caldecott, 2016; Bank of England, 2015; gas reserves versus the disproportionate amount held
Carbon Tracker Initiative, 2011; Caldecott, 2011). by states through national oil companies and other
2 The issue that has been raised by prominent international figures, from the former UN Secretary-General Ban Ki-moon to Mark Carney,
Governor of the Bank of England and Chair of the G20 Financial Stability Board (Carney, 2015).
3
Defined as the future emissions expected from current worldwide fossil fuel-burning infrastructures (Davis, Caldeira and Matthews, 2010).
4 Carbon budgets are the amount of CO₂ that can be emitted for a given probability (usually 50% or 66%) of keeping below an average
global rise in temperatures of usually 2°C (or 1.5°C) above pre-industrial levels.
12 S TRAN DED ASSETS A ND R E NEWA B L E Sstate-owned enterprises (Stevens, 2016). This focus or not the scale of asset stranding will vary should
on the stranded assets facing fossil fuel producers policy actions to achieve the Paris Agreement be
and power plants rather than on those end-use delayed. It should be noted that in the Delayed
sectors facing those that use fossil fuels misses Policy Action case, emissions during the period up
very significant impacts. Certain types of buildings, to 2030 would be higher than in the Remap case.
transport equipment and transport infrastructure, as To achieve the objectives of the Paris Agreement,
well as industry installations, are also characterised more investment (e. g. on bioenergy with CCS)
by a long life span and stranded asset risks. This would peraps be required to compensate for these
working paper argues that the value of assets at risk higher emissions.
is higher in end-use sectors than in supply sectors.
This working paper furthers existing analyses of 1.2 Defining stranded assets
stranded upstream fossil fuel assets and undertakes
a new analysis of asset stranding downstream, There are several definitions of stranded assets in
specifically in power generation, buildings and the energy context. The term “stranded costs” or
industry, three large sectors that are responsible “stranded investment” is used by regulators to refer
for 25%, 6.4% and 21% of direct global energy- to “the decline in the value of electricity-generating
related greenhouse gas emissions, respectively assets due to restructuring of the industry”
(Allen, Barros, Broome, et al., 2014). Refined (Congressional Budget Office, 1998). This was a major
methodologies to estimate the potential magnitudes topic for utility regulators when power markets were
of asset stranding in these three sectors are liberalised in the United Kingdom and the United
applied, as well as for the global upstream fossil States in the 1990s.
fuel production sector by 2050, which stems from
accelerated renewable energy and energy efficiency Several organisations that work in the field of energy
deployment, using IRENA’s REmap analysis. and climate have already examined what stranded
A breakdown of the scale of stranded assets facing assets could mean from their own perspective.
individual G20 countries is also provided. As there is The most commonly applied definitions are briefly
a dearth of analysis specifically targeting renewables discussed below:
and energy efficiency deployment as the key drivers
of stranded assets, this will fill a significant gap in the • The International Energy Agency defines stranded
current literature. assets as “those investments which have already
been made but which, at some time prior to the
Based on the REmap 2050 analysis, this working paper end of their economic life (as assumed at the
examines two cases. The first relates to accelerated investment decision point), are no longer able to
renewables and energy efficiency deployment from earn an economic return as a result of changes in
today until 2050 that deliver emissions reductions the market and regulatory environment brought
that have a two-out-of-three (66%) probability of about by climate policy” (IEA, 2013, p. 98).
maintaining global below-temperature change from
rising more than 2°C above pre-industrial levels • While the Carbon Tracker Initiative also defines
(“REmap”). Based on the REmap case, a carbon such economic loss in the same way, it indicates
emission budget of 880 gigatonnes (Gt) CO₂ is that the losses are a “result of changes in the
defined for the period 2015–50. This includes fossil market and regulatory environment associated
fuel and other (e. g. land use, industrial process) with the transition to a low-carbon economy”
emissions. This case assumes action will begin soon (Carbon Tracker Initiative, n. d.).
as a result of new policy initiatives.
• The Generation Foundation defines a stranded
In the second case, business as usual continues until asset “as an asset which loses economic
2030 (represented by the Reference Case here). value well ahead of its anticipated useful life,
Following 2030, the deployment of renewables whether that is a result of changes in legislation,
and energy efficiency accelerates sufficiently to regulation, market forces, disruptive innovation,
ensure that the global energy system remains societal norms, or environmental shocks”
within the same emissions budget by 2050. This is (Generation Foundation, 2013, p. 21).
the Delayed Policy Action case. Comparing these
two cases allows for an understanding of whether
WO RKI N G PAPE R 13• The Smith School of Enterprise and the IEA, 2008). When the amount of fossil fuels already
Environment at the University of Oxford employs combusted plus the amount of carbon in reserves yet
a ‘meta’ definition to encompass these (and to be burned reach the limit of the carbon budget,
other) definitions. It states that “stranded assets the value of fossil fuel reserves would decline unless
are assets that have suffered from unanticipated the amount of carbon were allowed to exceed the
or premature write-downs, devaluations, or budget, thus generating a climate change that is
conversion to liabilities”. dangerous. This concept of unexploited carbon
reserves was dubbed “unburnable carbon” by the
For the purpose of this analysis, stranded assets Carbon Tracker Initiative (2011) and was popularised
are defined as the remaining book value⁵ of assets in early 2010 by the U.S. environmentalist,
substituted before the end of their anticipated Bill McKibben (2011), among others.
technical lifetime and without recovery of any
remaining value to achieve 2050 decarbonisation Unburnable carbon represents a significant
targets. This definition emphasises that assets difference between the current value of the
become stranded because of the requirement listed equity of global fossil fuel producers
to reduce fossil fuel use to achieve a deeply and the reduced commercial value of their
decarbonised energy system by mid-century. reserves under a strict carbon budget constraint
(Carbon Tracker Initiative, 2011; Caldecott, 2011).
The idea that “unburnable” fossil fuel reserves have
1.3 E
volution of stranded assets the potential to become stranded assets has sparked
a significant discussion on the risk of investing in
While the climate change discourse has appropriated fossil fuels (Ansar, Caldecott and Tibury, 2013).
the term, asset stranding, in actual fact it occurs It has also helped spur a campaign aimed at forcing
regularly as part of economic development. divestments in fossil fuels (Ibid).
Schumpeter coined the term “creative destruction”,
and within this concept is the idea that value is created In parallel, the idea of a “carbon bubble” also gained
as well as destroyed, and that this dynamic process traction. This concept indicates that the existence of
drives innovation and economic growth. unburnable carbon would also signal that upstream
fossil fuel assets are significantly overvalued. This
Recent research on stranded assets has focused on would potentially create a financial bubble with
how the causes of asset stranding are increasingly systemic implications for the global economy
related to the environment, through a combination (Carbon Tracker Initiative, 2011; Caldecott, 2011).
of physical environmental change and societal
responses to such change. This is in contrast to Recent studies on stranded assets
previous drivers of creative destruction. Moreover,
such environment-related factors appear to be As part of the literature review for this working
stranding assets simultaneously across all sectors, paper, 29 studies that have attempted to quantify
geographies and asset classes and perhaps more the scale of asset stranding in different sectors and
swiftly than in previous instances. Such trends, geographies have been examined (Table 1). One of
furthermore, are accelerating, and such a tendency these relates to 1989, while the others date from 2013
represents a potential and unprecedented unknown or later. Twenty-two reports are global in coverage,
factor (Caldecott and McDaniels, 2014b). while seven are country specific. Seventeen address
upstream fossil fuel production, four relate to
Carbon budgets and stranded assets power generation, two review upstream production
and generation together, two are associated with
At the beginning of the late 1980s, individuals and agriculture, and four examine all sectors. None of
organisations working on climate and sustainability the studies addresses, in any detail, the buildings or
issues began to acknowledge the possibility that industry sectors.
climate change regulation could reduce the value
or profitability of fossil fuel companies (Krause,
Bach and Koorney, 1989; IPCC, 1999; IPCC, 2001;
5 Book value is defined here as the cost of an asset, minus accumulated depreciation.
14 S TRAN DED ASSETS A ND R E NEWA B L E STable 1: Studies reviewed that relate to stranded assets
Geographic
Authors Title Publisher Year Sector
Coverage
F. Krause, W. Bach and Energy Policy in the International 1989 Fossil fuels Global
J. Koomey. Greenhouse Project for
Sustainable
Energy Paths
M. Meinshausen, N. Meins “Greenhouse-gas Nature 2009 Fossil fuel Global
hausen, W. Hare, S.C.B. emission targets for reserves
Raper, K. Frieler, R. Knutti, limiting global
D.J. Frame and M.R. Allen warming to 2°C”
Caldecott, B. and “Bloomberg Carbon Bloomberg 2013 Oil & gas Global
G., Elders Risk Valuation Tool”, New Energy
White paper Finance
Carbon Tracker Initiative Unburnable Carbon Carbon Tracker 2013 Coal, oil, Global
2013: Wasted capital Initiative gas
and stranded assets
P. Spedding, K. Mehta Oil and Carbon HSBC Climate 2013 Oil Europe
and N. Robins Revisited; Value at riskChange and companies
from ‘unburnable’ HSBC Global
reserves Research
International Energy Redrawing the International 2013 Power, Global
Agency Energy-Climate Map: Energy Agency/ coal, oil,
World Energy Outlook Organisation gas
Special Report for Economic
Co-operation
and Develop-
ment
B. Caldecott, N. Howarth Stranded Assets in Smith School, 2013 Agriculture Global
and P. McSharry Agriculture: Protecting University of
Value from Environ- Oxford
ment-Related Risks
B. Caldecott, J. Tilbury Stranded Down Under? Smith School, 2013 Coal Australia
and Y. Ma Environment-related University of mining
factors changing Oxford
China’s demand for
coal and what this
means for Australian
coal assets
A. Ansar, B. Caldecott Stranded assets and Smith School, 2013 Oil and gas Global
and J. Tilbury the fossil fuel divest- University of
ment campaign: what Oxford
does divestment mean
for the valuation of
fossil fuel assets
Carbon Tracker Initiative Carbon supply cost Carbon Tracker 2014 Oil Global
curves: Evaluating Initiative
financial risk to oil
capital expenditures
WO RKI N G PAPE R 15Geographic
Authors Title Publisher Year Sector
Coverage
Carbon Tracker Initiative Carbon supply cost Carbon Tracker 2014 Coal Global
curves: Evaluating Initiative except
financial risk to coal China
capital expenditures
M.C.Lewis, S. Voisin, S. “Stranded assets, Kepler 2014 Fossil fuels Global
Hazra, S. Mary and R. fossilised revenues” Cheuvreux,
Walker ESG Sustainable
Research
B. Caldecott and Stranded generation Smith School, 2014 Gas utilities Europe
J. McDaniels assets: Implications University of
of European capacity Oxford
mechanisms, energy
markets and climate
policy
Bank of England The Impact of climate Bank of 2015 All Global
change on the UK England
Insurance Sector:
A climate change
adaptation report by
the Prudential
Regulation Authority
Carbon Tracker Initiative Carbon Asset Risk: Carbon Tracker 2015 Primary oil Global
from rhetoric to action Initiative and gas
Carbon Tracker Initiative The $2 trln stranded Carbon Tracker 2015 Oil, gas, Global
assets danger zone: Initiative thermal
How fossil fuel firms coal
risk destroying
investor returns
Carbon Tracker Initiative Carbon supply cost Carbon Tracker 2015 Liquefied Global
curves: Evaluating Initiative natural gas
financial risk to gas
capital expenditures
Paul Griffin, Amy Myers “Science and the Energy 2015 Oil and gas US
Jaffe, David Lont, and Stock Market: Investors’ Economics
Rosa Dominguez-Faus. Recognition of
Unburnable Carbon”
Mercer Investing in a Time of Mercer 2015 Energy Global
Climate Change sector
C. McGlade and P. Ekins “The geographical Nature 2015 Fossil fuels Global
distribution of fossil
fuels unused when
limiting global
warming to 2 °C”
B. Caldecott, G. Dericks Subcritical Coal in Smith School, 2015 Coal Australia
and J. Mitchell Australia: Risks to University of utilities
Investors and Implica- Oxford
tions for Policymakers,
Working paper
16 S TRAN DED ASSETS A ND R E NEWA B L E SGeographic
Authors Title Publisher Year Sector
Coverage
The Economist The cost of inaction: The Economist 2015 All sectors Global
Intelligence Unit Recognising the value Intelligence
at risk from climate Unit
change
A. Pfeiffer, “The ‘2C capital Applied Energy 2016 Electricity Global
R. Miller, C. Hepburn stock’ for electricity generation
and E. Beinhocker generation: Committed
cumulative carbon
emissions from the
electricity generation
sector and the
transition to a green
economy”
S. Dietz, A. Bowen, C. “‘Climate value at risk’ Nature Climate 2016 All sectors Global
Dixon and P. Gradwell of global financial Change
assets”
G. Muttit. The sky’s limit: Why Oil Change 2016 Fossil fuels Global
the Paris climate goals International
require a managed
decline of fossil fuel
production
C. Shearer, N. Ghio, Boom and bust 2016: Sierra Club, 2016 Coal Global
L. Myllyvirta, A. Yu Tracking the global CoalSwarm and
and T. Nace coal plant pipelines Greenpeace
B. Caldecott, Stranded assets and Smith School, 2016 Coal Global
L. Kruitwagen, G. Dericks, thermal coal: An ana University of utilities,
D.J. Tulloch, I. Kok lysis of environment- Oxford mining and
and J. Mitchell related risk exposure, processing
Working paper
B. Caldecott, Stranded assets Smith School, 2016 Coal Japan
G. Dericks, D.J. Tulloch, and thermal coal in University of utilities
L. Kruitwagen and I. Kok Japan: An analysis of Oxford
environment-related
risk exposure,
Working paper
A. Morel, R. Friedman, Stranded Assets in Smith School, 2016 Palm oil Indonesia
D.J. Tulloch and Palm Oil Production: University of and Malaysia
B. Caldecott A Case Study of Indo- Oxford
nesia, Working paper
WO RKI N G PAPE R 17These studies apply various methodologies and from which a sense of the order of magnitude of
quantify asset stranding over different time periods, the stranded assets can be determined. Moreover,
making it a challenge to compare studies. The figures studies often calculate cumulative asset stranding
below present, nevertheless, the studies in a way in a smooth or linear fashion over multi-decade
Figure 4: Estimated stranded oil, gas and coal reserves (percent of global total)
Oil, gas and coal Coal
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
Oil Change International Carbon Tracker International IEA/OECD McGlade,
2016 2016 Project for 2013 C. & Ekins, P.
Sustainable 2015
(Developed reserves (Reserves of listed EnergyPaths
oil, gas, coal) companies 1989
oil, gas, coal)
Gas Oil
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
IEA/OECD McGlade, International McGlade, International IEA/OECD
2013 C. & Ekins, P Project for C. & Ekins, P Project for 2013
2015 Sustainable 2015 Sustainable
EnergyPaths EnergyPaths
1989 1989
Source: IRENA analysis of cited reports
Note: The coal, gas and oil figures show range of estimated stranded oil, gas and coal reserves as a percentage of proven reserves
for each of those commodities.
18 S TRAN DED ASSETS A ND R E NEWA B L E Stime periods. Asset stranding, however, may occur Some of the studies reviewed as part of this
at a non-linear pace, which is that stranded fossil working paper mark down future income from
fuel assets have been hypothesised as contributing specific assets under different carbon budgets and
to financial instability. The timing and pace of asset then compare valuations (e. g. IEA/OECD, 2013;
stranding – not only in terms of its cumulative scale – Carbon Tracker Initiative, 2014). These studies each
determines the severity of impact on companies, take varying views on the size of markdowns caused
investors and countries. by different carbon budget constraints and on how
swiftly the markdowns occur. They use separate
Figure 4 presents the range of estimated stranded datasets based on the sectors analysed, and these
oil, gas and coal reserves as a percentage of total vary in terms of coverage and accuracy. Other
reserves. The drivers of stranding across each of studies apply a similar “bottom-up” methodology,
these studies reflect carbon budget constraints, and although they focus on non-carbon, budget-related
the studies tend to apply a 2°C target with a 50% or drivers of asset stranding, such as water stress and air
66% probability. One study (Muttit, 2016) examined pollution (e. g. Caldecott, Dericks and Mitchell, 2015;
all listed and non-listed developed oil, gas and coal Caldecott et al., 2016a).
reserves. Carbon Tracker Initiative (2013) examined
all oil, gas and coal reserves held by listed companies. Several other methodologies have been employed
Three studies (Krause, Bach and Koorney, 1989; to estimate the value of stranded assets. Lewis et
McGlade and Ekins, 2015; IEA, 2013) examined all al, (2014) take an aggregate “top-down” approach
proven oil, gas and coal reserves. In this working paper, looking at sector-wide revenues. They calculate the
the three fossil fuels are distinguished to enable a net impact of a 2°C carbon budget on the projected
fuel-by-fuel comparison. These studies estimate that revenues of the global upstream fossil fuel industry.
50–80% of total fossil fuel reserves could become They find that the difference in revenue (in constant
stranded. Specifically, the studies estimate that 2012 U.S. dollar terms) between a 2°C scenario and
34–49% of oil reserves, 49–52% of gas reserves and business as usual is USD 28 trln in the period 2013–35.
77–87% of coal reserves would be stranded to meet Of that, there would be USD 19.3 trln of unrealisable
carbon budget constraints. The range of estimates revenue in the oil industry, USD 4 trln in the gas
around gas is very small (3 percentage points), industry and USD 4.9 trln in the coal industry.
followed by coal (10 percentage points) and oil
(15 percentage points). Other studies have deployed “value at risk” (VaR)
methodologies to estimate the potential impact
Other studies have attempted to quantify the impact of of stranded assets. VaR is used to determine the
decarbonisation on financial assets, such as equities and probability of a defined loss. Dietz et al. (2016)
bonds. Dietz et al. (2016) examined all financial assets, calculate that the loss measured by the 1 percent
and two studies (Bank of England, 2015) reviewed VaR due to a business-as-usual emissions pathway is
global listed equities. Other studies investigatged 16.9% of all global financial assets, or USD 24.2 trln
different asset classes (investment-grade bonds, high- (i. e. a 1 percent chance of the annual loss exceeding
yield bonds, leveraged loans)⁶ and separate sectors (oil, USD 24.2 trln). Caldecott, Haworth and McSherry
gas and coal; agriculture; oil and gas). There is a very (2013) focus on agriculture and calculate the VaR
large range in the estimates of equity value that might facing the sector from an extreme loss of natural
be stranded in upstream oil and gas. BNEF (2013) puts capital. They find that the loss measured by the
the range of stranded oil and gas equities from as low 1 percent VaR is USD 10.4 trln (i. e. a 1 percent chance
as 10% to as high as 90% of the total amount of such of the annual loss exceeding USD 10.4 trln).
equities. Spedding, Mehta and Robins (2013) places the
range for oil equities alone at 40–60%. The wide range Other studies have employed Integrated
of estimates from these studies shows that there is Assessment Models that attempt to maximise social
no clear answer regarding the magnitude of stranded welfare under several imposed constraints. Using
financial assets. The explanation depends on a range of such models, McGlade and Ekins (2015) find that,
factors, which also include essential regional variations. globally, a third of oil reserves, half of gas reserves
6 Investment grade bonds have a credit rating of BBB- or higher from Standard & Poor’s or Baa3 or higher by Moody’s; high-yield bonds
offer a higher rate of interest due to a higher risk of default. Leveraged loans are offered by banks and banking syndicates and they bear
a higher risk of default. Therefore, a leveraged loan is costlier to the borrower.
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