Valuing fuel diversification in optimal investment policies for electricity generation portfolios

Malte Sunderkoetter () and Christoph Weber

No 904, EWL Working Papers from University of Duisburg-Essen, Chair for Management Science and Energy Economics

Abstract: Optimal capacity allocation for investments in electricity generation assets can be deterministically derived by comparing technology specific long-term and short-term marginal costs. In an uncertain market environment, Mean-Variance Portfolio (MVP) theory provides a consistent framework to valuate financial risks in power generation portfolios that allows to derive the efficient fuel mix of a system portfolio with different generation technologies from a welfare maximization perspective. Because existing literature on MVP applications in electricity generation markets uses predominantly numerical methods to characterize portfolio risks, this article presents a novel analytical approach combining conceptual elements of peak-load pricing and MVP theory to derive optimal portfolios consisting of an arbitrary number of plant technologies given uncertain fuel prices. For this purpose, we provide a static optimization model which allows to fully capture fuel price risks in a mean variance portfolio framework. The analytically derived optimality conditions contribute to a much better understanding of the optimal investment policy and its risk characteristics compared to existing numerical methods. Furthermore, we demonstrate an application of the proposed framework and results to the German electricity market which has not yet been treated in MVP literature on electricity markets.

Keywords: power plant investments; peak load pricing; mean-variance portfolio theory; fuel mix diversification (search for similar items in EconPapers)
JEL-codes: C44 G11 L94 Q43 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2009-11, Revised 2009-11
New Economics Papers: this item is included in nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:dui:wpaper:0904

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