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: https://doi.org/10.1016/j.eneco.2007.11.008

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.

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About

• Item ORO ID
• 35424
• Item Type
• Journal Item
• ISSN
• 0140-9883
• Project Funding Details

• Funded Project Name	Project ID	Funding Body
  Not Set	Not Set	Florence School of Regulation
  Not Set	Not Set	British Council
  Not Set	Not Set	Cambridge-MIT Institute

• Keywords
• fuel mix diversification; Monte Carlo simulation; electricity and fuel price risks; Mean–Variance Portfolio theory
• Academic Unit or School
• Faculty of Science, Technology, Engineering and Mathematics (STEM) > Engineering and Innovation
  Faculty of Science, Technology, Engineering and Mathematics (STEM)
• Copyright Holders
• © 2007 Elsevier B.V.
• Depositing User
• William Nuttall