The Benefit of Regional Diversification of Cogeneration Investments in Europe: A Mean-Variance Portfolio Analysis

Günther Westner () and Reinhard Madlener
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Günther Westner: E.ON Energy Projects GmbH, Postal: Arnulfstrasse 56, 80335 Munich, Germany

No 5/2009, FCN Working Papers from E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN)

Abstract: The EU Directive 2004/8/EC, concerning the promotion of cogeneration, established principles on how EU member states can support combined heat and power generation (CHP). Up to now, the implementation of these principles into national law has not been uniform, and has led to the adoption of different promotion schemes for CHP across the EU member states. In this paper, we first give an overview of the promotion schemes for CHP in various European countries. In a next step, we take two standard CHP technologies, combined-cycle gas turbines (CCGT-CHP) and engine-CHP, and apply exemplarily four selected support mechanisms used in the four largest European energy markets: feed-in tariffs in Germany; energy efficiency certificates in Italy; benefits through tax reduction in the UK; and purchase obligations for power from CHP generation in France. For contracting companies, it could be of interest to diversify their investment in new CHP facilities regionally over several countries in order to reduce country and regulatory risk. By applying Mean-Variance Portfolio (MVP) theory, we derive characteristic return-risk profiles of the selected CHP technologies in different countries. The results show that the returns on CHP investments differ significantly depending on the country, the support scheme, and the selected technology studied. While a regional diversification of investments in CCGT-CHP does not contribute to reducing portfolio risks, a diversification of investments in engine-CHP can decrease the risk exposure.

Keywords: Combined heat and power; CHP promotion scheme; Portfolio optimization (search for similar items in EconPapers)
JEL-codes: C15 D81 G11 Q48 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2009-11, Revised 2010-03
New Economics Papers: this item is included in nep-ene and nep-eur
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Citations: View citations in EconPapers (27)

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Related works:
Journal Article: The benefit of regional diversification of cogeneration investments in Europe: A mean-variance portfolio analysis (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:fcnwpa:2009_005

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