Stranded assets are large investments which have been rendered useless by an unexpected market change. They can no longer produce revenue, but still must be paid for.
Stranded Stadiums and Power Plants
Imagine your city spends $100 Million dollars to build a new football stadium. Voters authorize borrowing the money for the stadium, to be repaid by taxpayers over twenty years, plus interest. Football game revenues are expected to cover the debt payments.
But suddenly, unexpectedly, your city’s football team decides to move out of state. And you can’t find a replacement team. So the stadium is suddenly useless – and there’s no football revenue coming in to pay back the $100 million bond.
Impossible? It happens all the time. Massive projects get built with borrowed money, only to become a financial burden on their owners when the market changes and they’re no longer needed.
These investments are called ‘stranded assets’. Because your money is ‘stranded’ or lost in them… they’re a total waste, with no way to recoup any value.
The most common stranded assets today are fossil fuel power plants that are now being sharply undercut on price by solar and wind power. Demand for assets like coal mines and power plants, oil and gas wells, and pipelines has dropped significantly, but billions of dollars are still owed to repay the costs of building them. They were expected to be used for decades, but now are ‘stranded’ after only a few years.
Who pays the IOUs on these ‘stranded’ assets that can no longer be used economically? And who pays to shut them down and clean them up?
In the case of the stadium, the government (taxpayers) will probably end up footing the bill. And perhaps also for the fossil fuel power plants… once a huge expensive asset like that is no longer useful, the business sector tends to walk away, leaving taxpayers holding the bag.
The lesson we should all learn is: think hard before making a massive investment which needs to be paid back over several decades (like coal plants or sports stadiums).
Because you wouldn’t want your money to get stranded.