PPC: a Heraclean decarbonisation

5 minute read

Greek utility PPC did not look likely to achieve its 2023 emissions reduction target this time last year, having fallen short of its previous goal. However, by choosing to exit lignite coal the company was able to accelerate its decarbonisation. The rapid transition may in part have been motivated from a desire to avoid a step-up on its outstanding Sustainability-Linked Bond (SLB).

PPC has two outstanding SLBs – one maturing in 2026 and another in 2028. The company failed to meet the Scope 1 emissions reduction target for 2022 linked to the former bond, and was therefore forced to pay a 50bps step-up.

The poor decarbonisation performance through 2022 made the 2023 target, linked to the 2028 bond, appear exceedingly ambitious. But PPC defied expectations, and on April 9 disclosed a 5.1 mt emissions reduction year-on-year, clearing the 2023 target and avoided a 25bps step-up on the 2028 bond.

The market reaction has been significant. The option pricing approach to valuing SLBs holds that the curve between these two bonds should steepen in response to the 2028 bond’s option value dissipating. Such a steepening did not occur when it was first suggested that PPC would hit its 2023 targets; however since it was confirmed in early April, significant steepening has taken place, confirming the market is now pricing in the different characteristics of the 2026 and 2028 bonds.

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