Energy executives evaluating capital investments in fossil-fuel infrastructure hear two very different narratives about the future. On the one hand, pricing levels and the demands of the market signal the need for new capital investment in the energy system. On the other, energy companies are under pressure from investors, regulators, and other stakeholders to throttle investments in fossil-fuel infrastructure, to help put the world on an emissions path consistent with a 1.5°C temperature rise from preindustrial levels.
Much of the discussion on fossil-fuel assets is binary. That is, they’re either vital to prosperity or unacceptable given climate change. In spite of this uncertainty, executives still need to make investment decisions on energy infrastructure, based on the economics of each project. Increasingly, a top concern is the risk of stranded-asset costs: that a power plant, refinery, oil well, or other assets won’t continue to operate through its useful life due to changes in policy or economic shocks. This is no small change, but rather a fundamental reshaping of the rules that have guided energy infrastructure investment for more than a century.
Management teams are reimagining their investments in traditional energy assets, despite uncertainty about future returns or terminal value. When combined with a sound energy transition strategy, companies can navigate risks associated with individual projects and build the right assets for the coming years. But the time to start managing stranded cost risk is now.
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