Propagation of Climate-Related Transition Risks between the Financial and Electricity Sectors

Climate-related stranded assets have attracted attention owing to growing concerns over the negative impacts of decarbonisation on the value of assets of carbon-intensive industries and the economy-wide knock-on effects of massive value destruction within the fossil fuel industry. However, the propagation of climate-related transition risk to the electricity sector through both financial and non-financial networks has been under-investigated. A literature review was conducted to extract theoretical causal channels and to identify bottlenecks on the ground. In theory, the financial sector revalues the costs of capital and financial assets and employs various measures to transfer the risk. On the ground, few energy and electricity companies have stepped into the early retirement of existing capacity even though major private banks, institutional investors, and export credit agencies worldwide are changing engagement with them. Chinese state banks’ continuous financing of coal power remains a barrier to the early retirement of new capacity. Financial approaches to individual companies can change these behaviours only when they are synchronised with changes in the electricity system and when accessibility to critical minerals, metals, and technologies for flexible and dispatchable generation capacity is ensured. The research incorporates empirical evidence to update the analytical framework used.