Quantifying the implied risk for newly-built coal plant to become stranded asset by carbon pricing

Highlights: • The risk for China's coal plant to become stranded asset under carbon pricing is quantified • The probability distribution over time for coal plant to become stranded is obtained. • The expected lifespan of newly-built plant is estimated in carbon pricing scenarios. • Plant lifespan is expected to be shortened by 3 years under carbon price of 50 CNY/tCO₂. With carbon pricing being implemented, current investment in carbon-intensive energy infrastructure will be exposed to carbon pricing risk, and some may even become stranded assets. In this work we build a real options-based model to quantify the implied risk for newly-built coal plants to become stranded assets by carbon pricing, and focus on the case of China, which is heavily relying on coal power and is introducing a nation-wide carbon market, to make a case study. The probability distribution over time for coal plant to become stranded is obtained, and the expected lifespan of newly-built plant is estimated in carbon pricing scenarios. Our results show that carbon pricing will increase the risk for coal plants to become stranded assets and the plant lifespan will be shortened accordingly. Moreover, higher carbon price and auction ratio of carbon permits will lead to higher stranding risk. Specially, in the case of full auction of carbon permits, with the average carbon price of 50 CNY/tCO₂ observed in China's emission trading pilots being introduced, the expected lifespan is shortened by 3 years; further with the carbon price reaching 100CNY/tCO₂, the expected lifespan is shortened by 10 years. Thus the implied risk of coal plants' becoming stranded assets by carbon pricing should be incorporated into the investment evaluation, to avoid making myopic and even wrong decision.