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Fuel mix diversification incentives in liberalized electricity markets: a Mean–Variance Portfolio theory approach

Roques, Fabien; Newbery, David M. and Nuttall, William J. (2008). Fuel mix diversification incentives in liberalized electricity markets: a Mean–Variance Portfolio theory approach. Energy Economics, 30(4) pp. 1831–1849.

DOI (Digital Object Identifier) Link: http://dx.doi.org/10.1016/j.eneco.2007.11.008
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Abstract

Monte Carlo simulations of gas, coal and nuclear plant investment returns are used as inputs of a Mean– Variance Portfolio optimization to identify optimal base load generation portfolios for large electricity generators in liberalized electricity markets. We study the impact of fuel, electricity, and CO2 price risks and their degree of correlation on optimal plant portfolios. High degrees of correlation between gas and electricity prices – as observed in most European markets – reduce gas plant risks and make portfolios dominated by gas plant more attractive. Long-term power purchase contracts and/or a lower cost of capital can rebalance optimal portfolios towards more diversified portfolios with larger shares of nuclear and coal plants.

Item Type: Journal Article
Copyright Holders: 2007 Elsevier B.V.
ISSN: 0140-9883
Project Funding Details:
Funded Project NameProject IDFunding Body
Not SetNot SetFlorence School of Regulation
Not SetNot SetBritish Council
Not SetNot SetCambridge-MIT Institute
Keywords: fuel mix diversification; Monte Carlo simulation; electricity and fuel price risks; Mean–Variance Portfolio theory
Academic Unit/Department: Mathematics, Computing and Technology > Engineering & Innovation
Item ID: 35424
Depositing User: William Nuttall
Date Deposited: 15 Nov 2012 16:59
Last Modified: 15 Nov 2012 16:59
URI: http://oro.open.ac.uk/id/eprint/35424
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