By early next year, Thailand and other countries are expected to update national climate commitments under the Paris Agreement, known as nationally determined contributions (NDCs). The Paris Agreement mandates that nations submit new NDCs every five years, with each round more ambitious than the last. These NDCs are essential for countries to collectively tackle the global climate crisis.
Unfortunately, current NDCs are insufficient to prevent increasingly severe climate impacts and limit global temperature rise to 1.5 degrees Celsius. According to the UN's Emissions Gap Report 2023, the world is on course for a catastrophic 2.5-2.9 degrees Celsius of warming by 2100 based on current commitments. Therefore, there is significant pressure for next year's NDCs to be substantially stronger.
Thailand's second NDC, submitted in 2022, includes an unconditional emissions reduction target of 30% and a conditional target of 40% by 2030 compared to the business-as-usual (BAU) scenario. This is an improvement over the first updated NDC submitted in 2020, which had an unconditional reduction target of 20% and a conditional target of 25% by 2030.
Additionally, in 2022, Thailand submitted its revised Long-Term Low Emission Development Strategy (LT-LEDS), aiming for carbon neutrality by 2050 and net zero emissions by 2065.
Despite these advancements, Thailand's net zero target is still the slowest in Asean. The Climate Action Tracker indicates that the updated NDC does not yet represent a fair share contribution and remains far from being compatible with the 1.5C goal. As a result, Thailand's overall rating is still categorised as "critically insufficient."
This slow transition poses not only climate risks but also business risks. Governments may impose stricter regulations to curb emissions, resulting in higher costs for economies with high carbon emissions. Sudden regulatory changes and technological advancements in the clean energy transition could also render fossil-related infrastructure, such as power plants, LNG terminals, and oil refineries, as stranded assets.
What are stranded assets?
Stranded assets may sound like another financial jargon, but the concept is straightforward and closely linked to Joseph Schumpeter's theory of creative destruction. Schumpeter described creative destruction as the process by which new innovations disrupt and replace outdated industries and technologies, leading to economic growth and progress.
To illustrate, you might have an example of this concept in your pocket right now. Since the iPhone revolutionised the mobile phone market in 2007, the rapid advancements in smartphone technology have made older mobile phones nearly obsolete, drastically reducing their market share and destroying value in the supply chain.
A similar transformation is occurring in the energy sector. The International Energy Agency's World Energy Outlook 2023 forecasts that the peak use of the three main fossil fuels -- oil, gas, and coal -- will occur by 2030 due to the widespread adoption of electric vehicles and the decreasing cost of renewable energy. This shift is expected to render many fossil fuel-related infrastructures obsolete.
The Grantham Research Institute defines stranded assets as investments that have lost value or become liabilities before the end of their expected useful life, often due to changes in technology, market conditions, regulations, or societal shifts. These assets suffer from unanticipated or premature write-downs, devaluations, or conversion to liabilities, highlighting the financial risks associated with continued investment in outdated technologies.
Quantification of Stranded Risk
To quantify the impact of stranded assets in coal and gas power plants in Thailand, my colleagues and I at Climate Finance Network Thailand (CFNT) applied a scenario analysis. We considered the implications if Thailand continues to develop its energy generation according to the latest official Power Development Plan, PDP 2018 Revision 1, but then shifts to comply with the country's NDC or aims for a more ambitious goal like the 1.5C limit.
Using the Discounted Cash Flow (DCF) model, a well-established methodology for asset valuation, we found that if Thailand complies with the recent NDC path, the stranded asset cost in the power generation sector could be approximately 360 billion baht. If Thailand adopts an ambitious goal to achieve 100% renewable energy and the 1.5C target, the stranded assets' value may exceed 530 billion baht.
The major owners of these coal and gas power plants are large publicly traded companies listed in the SET50 stock index. Our analysis indicates that the value of these companies could be affected by stranded costs ranging from 6% up to 61% of their market capitalisation, depending on the type of power plant and the proportion of their revenue derived from domestic power plants.
Furthermore, the risk may extend beyond company shareholders. Many of these companies finance their projects through syndicated loans and corporate bond issuances. As a result, lenders and bondholders are also exposed to increased risks of default, particularly due to future changes in energy policy trajectories.
The Reckless Expansion
Power plants are only one part of the broader fossil fuel infrastructure. When examining the entire supply chain, a troubling trend of rapid expansion emerges. LNG facilities, including regasification and storage terminals, are being expanded to compensate for unstable supply due to the political crisis in Myanmar and depleting reserves in the Gulf of Thailand.
Recently, the new Nong Fab LNG terminal began operations to meet the surging LNG demand, which increased by 16% to a record 6 million tonnes in 2023. This trend of constructing more gas infrastructure to support gas power plants is likely to continue, as evidenced by the under-construction LNG Map Ta Phut terminal 3 phase 1, which is planned to support an additional 6,300 MW of new gas power plants according to the draft PDP2024.
The expansion is not limited to LNG facilities. In the gas separation sector, major developments include PTT's investments in new gas separation plants -- the GSP-7 and GSP-8 projects.
PTT also plans to extend its existing gas pipeline network by an additional 200km. In the oil refinery sector, a notable project is Thai Oil's (PTT's subsidiary) Clean Fuel Project (CFP), which aims to convert high-sulphur fuel oil into higher-value products like diesel and jet fuel. This project is aimed at boosting fuel exports to markets like Cambodia, Laos, and Myanmar.
While the world strives to achieve net zero emissions, it seems rational for any government to align its energy development trajectory with climate goals as soon as possible to avoid transition risks and stranded costs.
In contrast, Thailand's continued expansion of fossil-related infrastructure appears to be a financial gamble. This move is fraught with risks of creating stranded assets, which could have profound financial implications.
To avoid a "stranded future", it is crucial for Thailand to accelerate its transition to a low-carbon economy. This requires adopting more robust climate commitments and implementing proactive policy adjustments to align with global climate goals. By doing so, Thailand can ensure that its energy infrastructure remains economically viable and environmentally sustainable in the face of a rapidly evolving global energy landscape.
Rapeepat Ingkasit is a head of research at Climate Finance Network Thailand (CFNT), a think tank devoted to propelling sustainable financial practices and assisting in Thailand's transition towards a low-carbon economy. Learn more at https://climatefinancethai.com.