Event Discusses Africas Development in The Age Of Stranded Assets

One of the main topics of concern facing the analysts of deregulation is the question of the so-called stranded costs. The term “stranded costs” has emerged as an issue only in the context of electricity deregulation. For instance, there was little or no attention paid to stranded costs in the discussions on airline deregulation, trucking deregulation, and most oddly, the breakup of AT&T. Note 1 Why the issue appears now and not in the first cases of deregulation is an interesting question, but one we leave unanswered here. Even so, the fact that there is little intellectual history is revealing.

Of $5,000,000, to only be able to generate total undiscounted future cash flows of $3,000,000. In agriculture and forestry, the risk of the stranding of assets is significant. Some cities have low emission zones in place, which put limits on the allowed exhaust gas emissions. Not all combustion engine vehicles may reach these emission limits and vehicle owners may decide to convert their vehicle to run on a different fuel because of it . Possibilities include conversion of their existing vehicle to electric propulsion , conversion of their existing vehicle to hydrogen , ethanol, biobutanol, biodiesel, bioether, …

• Numerous maneuverings in 1979, including an emergency rate increase, sales of stock, and rearranging of credit lines signaled trouble.
• The goal of regulation in general should be to make the economy work more efficiently in order to maximize the wealth of its citizens.
• Knowing where a parcel of farmland gets water – from a well, river, water district, or a smart water market – can help investors identify real-time, on-the-ground water risks.
• In spite of this, there was no idling of any productive facilities of PSNH.

It should be mentioned here that oil companies produce not only fuel (i.e. gasoline, diesel, …) from crude oil but also produce various fossil oil derivates which are used by the petrochemical industry. To replace fossil oil-based plastic, the petrochemical industry itself is looking at bioplastics which are made using substances obtained from crops . In some cases, existing fossil oil refineries can be repurposed as biorefineries Biorefineries may produce alternative fuels, but also a wide range of other derivates depending on the feedstock used. That is, some of these projects risk becoming stranded assets even before they are built. Moreover, investors are under huge pressure to determine which energy companies are “Paris-compliant.”

U S Stock Market No Longer Subject To The Laws Of Gravity

In addition, the firm’s current equity value includes the possibility that in the move to competition, regulators will allow the firm something extra, something in addition to a pat on the back as the firm walks out the door into the world of competition. There is the chance that regulators will allow the firm to recover part, all, or even more than the firm’s true stranded costs . Most observers seem to think that regulation will allow partial but not full recovery of stranded costs. In the extreme, if the financial market feels that there will be no stranded cost recovery, then the current stock price is equal to the fair market value of the firm’s assets in competition. If the financial market feels that full recovery will occur, then the current stock price can be no larger than book value if there are true stranded costs. Finally, if the financial market feels that firms will get more than true stranded costs, then the current stock price can be larger than book even if the fair market value of the firm is less than book. Throughout 1995 the stock market continued to react to news of deregulation in the industry and to economy-wide and world-wide events that implied changes in the cash flows of electric utilities.

The other two firms had long, drawn out experiences with the threat of bankruptcy, which are detailed below. Market price declines squeeze the margins that producers can expect to realize from the extraction, delivery and refining of hydrocarbon-based fuels.

Similar booms and busts can hit the agricultural sector, as changing weather patterns drive growers to experiment with risky or unproven crops. Stranded assets are assets that are unable to earn their original economic return due to changes in the landscape in which the assets operate. In simpler terms, stranded assets are assets that are worth less than expected. There are proposals to allow some, but not all of stranded costs to be transferred to producers. For instance, if producers are efficiently allowed to charge consumers or taxpayers half of their stranded costs, then consumer welfare decreases by the amount of the stranded cost recovery. As long as this recovery is not based on unit price increases or transmission cost increases, there is no reduction in the net welfare gains from competition.

Managing The Risk Of Stranded Assets In Agriculture And Forestry

Stranded asset and transition risk is therefore extremely low for this strategy. Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes. For freight transport, entrepreneurs can opt to transport their goods by rail or sea as an alternative to road transport . This avoids possible problems such as road congestion, blind spot accidents with trucks in city center streets, …

But regardless of whether its fair market value is larger or smaller than its book value, it will be productively employed. If the market expects that firms will get something but no more than true stranded costs, the market applies the expectation of this likelihood to the current valuation.

A new CEO in 1985 began an acquisition binge in auto financing, venture capital, real estate, and investments in thrift institutions that by the end of 1988 had swollen to nearly 40 percent of the company’s assets. The possibility that bankruptcy protection would be sought was raised in May of 1990. Auditors claimed the company could not stay afloat in April of the following year, and creditors attempted to force Chapter 11 proceedings in July.

Protecting Against Stranded Assets Due To Water Risk

It has ranked many companies in the meat, fish and dairy sector as performing poorly. The consequences of how we think about and value our energy future are getting more real, and more critical, every day. Investing is allocating resources, usually money, with the expectation of earning an income or profit.

At the end of five years, the net present value of the expected future cash flows is $1.12 million. Note 4In sum, the accounting approach says that the plant is now worth $500,000 and the valuation approach says that the plant is worth $1.12 million. Alternatively, there is the discounted cash flow or net present value approach. This valuation approach is based on the idea of efficient capital markets. Since the value of the expected net cash flows is $1.74 million, economic theory argues that in an efficient capital market a buyer can be found who will pay this sum.

The important point to keep in mind here is that capital costs have been too low for producer investors. The opportunity cost of capital includes all the inherent risks, and by virtue of the existing regulations, the opportunity cost to investors has been too low. The value of the contract becomes negative to the buyer if the spot price or the expected spot price declines below the contract price. The present value of the difference between the contract price and the current price, times the required purchase volume will be the change in capital values accruing to firms with these purchase contracts outstanding. Firms with large volume purchase contracts at prices higher than anticipated under competition will sustain value losses when the price declines from its current regulated levels. For example suppose a power company has a contract to buy one million kwh of electricity per year for the next ten years from some supplier at a price of 12 cents per kwh. The spot price of power and the long-term contract price are identical.

Continued Depressed Oil Prices Could Lead To Stranded Assets

Basically there is but one efficient way to transfer funds from electric utility consumers to producers, and that is with fixed or access fees. The most notable recent example of financial distress is Public Service Company of New Hampshire . PSNH was the lead partner in the construction of the Seabrook Nuclear Power Generator. Seabrook was a troubled project from the beginning, which can be marked as the application for a construction permit in early 1972.

• In Japan however, the decommissioning of the nuclear power plants remains difficult because with 42 operable reactors in place and only 9 reactors in 5 power plants actually operating, a huge amount of low-carbon power production gets lost if the decommissioning is permanent.
• If market price is larger than average production cost for an asset, then it will be employed.
• Similarly, GRESB introduced a newHealth and Well-being Modulein 2016 to monitor how real estate companies and funds promote the health of their employees and, importantly, of their tenants, customers and the communities surrounding their real estate assets.
• Alternatively, there is the discounted cash flow or net present value approach.
• By 1981, there were none with AAA ratings and just 25 percent had a rating of AA.
• Depending on the contract closed with the miners, the mine owner can be at risk of being sued for fatal accidents and other health damage caused by the laborers working in the mine.

Overall, stock prices in the electric utility industry rose in 1995 by nearly as much as they fell in 1994. Notably, Niagara Mohawk had an equity value decline of 25 percent in 1994 and 58 percent in 1995 for a two-year return of -68 percent. On the other hand, some firms regained in 1995 all that they had lost in 1994 and more. For instance, the Southern Co. only lost 4 percent in 1994 and gained 21 percent in 1995.

For Investors

Because of its shareable, customizable, verifiable nature, it can serve as a “single source of truth” that makes it easier for affected parties to work together to identify and mitigate water risk. Short animation examining how, within the next decade, climate change will increasingly disrupt lives with climate hazards such as droughts, flooding and wildfires striking harder and more often. In a series exploring women in international affairs, global environmentalist, Dr Jane Goodall DBE, speaks to Gitika Bhardwaj about why humanity still has reason to hope. Under IFRS, the asset’s carrying value is compared to the fair value less costs to sell the asset and the fair value in use .

• First-generation biofuels are fuels made from food crops grown on arable land.
• Sensitivity analyses that reflect a range of scenarios, including a 2 degree Celsius limit, are described as critical for identifying stranded asset risks.
• Even so, it does not seem to have had led to a significant decline in the flow of capital to public enterprises.
• Avoiding the emission of pollutants from fossil fuel power plants is essential to help avoid the possibility of lawsuits being filed against the operators of the power plant.
• By 1974, dozens of nuclear projects outside of the Pacific Northwest had been canceled, and a greater number were being delayed.
• The global economy stands the risk to lose large amounts of value from assets becoming unproductive and misallocation of capital.
• Layoffs, salary cuts, and dividend cuts were implemented in its battle to survive the costs of its Shoreham nuclear power plant.

Moreover, there is mounting evidence that incorporating health and wellbeing concerns into urban planning and the design of buildings canincrease productivity in officesandimprove public health. A recentGreengageHealth and Wellbeing Assessmentof a large-scale community development and sports facility in Cambridge shows the substantial health and financial value of increasing sporting provision.

These purchase power contracts whether voluntary or mandatory are analytically identical to the physical capital problem just described. The contracts mandate a minimum amount of power to be purchased at a pre-specified price.

The conclusion is that there will be few if any stranded production facilities due to deregulation. Figure 8 demonstrates the relative efficiency of two-part prices over unit-cost recovery. Again under competition and no recovery of stranded costs, the price of electricity will be Pc and consumption will be qc. Suppose there are n homogeneous consumers who create the demand for power. Then suppose that R is the amount of stranded costs that regulators have mandated that utilities be allowed to recover. Assuming that there are no income effects in demand generated by this access fee, then demand is unaltered.

Energy Prices In Europe: A Costly Winter Is Coming

If, at the five year point the new revenue stream exists and the facility continues to operate, then the equity value is $224,775. Under any scenario, the company is worth more money if it continues to operate the facility. The plant which originally cost $1 million to build and which is being carried on the accounting books as having a value of $500,000 is now only worth $224,775 in the marketplace. The market value of the plant has plummeted because the price of its output has gone down. Stranded asset risk – assets which suffer material and/or sudden demand changes may become ‘stranded’ either physically or economically. Stranded asset risk and portfolio risk if there is a high level of exposure to sectors with high climate-related risks, such as carbon intensive energy generation. Stranded assets impact both the balance sheet and income statement (non-cash loss).

Fishing ships are expensive to purchase and maintain and operate , while a catch is never guaranteed . In order to reduce the possibility of diseases occurring in closed circuit systems, integrated multi-trophic aquaculture is used which integrates fish farming and aquatic plant farming. Plants hereby take up nutrients excreted from the fish, reducing the likelihood of diseases occurring. Some have switched to community-supported agriculture, in which the farmer is paid a fixed price for crops he supplies to his customers on a weekly or monthly basis . This avoids price variability and thus reduces financial risk for the farmer.

Understanding Risk Assets

For last-mile delivery (i.e. in city centers), distribution centers can be used. They allow easy restocking of supermarkets, outlet stores, restaurants, and more in city centers. They rely on tractor units to unload their cargo in the suburban distribution center. The products are then placed in a small truck (sometimes electrically powered), freight bicycle, or other vehicle to bridge the last mile to the destination in the city center. In some low-lying coastal areas, the risk of buildings being inundated has increased due to the effects of climate change . However, the risk of construction (for construction companies, investors, …) decreases if preventive measures executed.

Where complexity is unavoidable, it should be commensurate with the magnitude of the problem to be solved.5. Stranded asset risk is appropriately managed.29 AEMC, National Electricity Amendment Rule 2010, Options Paper, September 2010, pg.

The fact that insolvent utilities remained viable producers of electricity both during and after financial restructuring suggests that electricity customers will not be harmed by any wealth losses visited upon utility investors. Let’s return to our second answer to the question, Why is so much made of stranded costs in the case of electric utilities? As we have pointed out in detail above, stranded costs cannot, by themselves, idle or render unusable any facility. However, some analysts question the effect of stranded costs on the expansion or contraction of capital in the industry.

The Washington Public Power Supply System was organized in 1957 for the purpose of developing electric power generating facilities. WPPSS and the Bonneville Power Administration made ambitious plans to develop as many as twenty nuclear power plants to serve the Pacific Northwest region. The first project, begun in 1971, was to build three plants at an expected cost of $1.6 billion; these costs were to be shared by 105 municipal utilities and five private utilities involved as partners. In 1976 most of these same utilities combined to build two additional plants. By 1974, dozens of nuclear projects outside of the Pacific Northwest had been canceled, and a greater number were being delayed. There has even been a Savings & Loan related failure in the electric power industry. Tucson Electric Power Co’s troubles stemmed from a “stream of misdirected investments” in ventures unrelated to electricity.