Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach

Fabien A. Roques, David M. Newbery and William J. Nuttall

Energy Economics, 2008, vol. 30, issue 4, pages 1831-1849

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.

Downloads: (external link)
http://www.sciencedi ... 0967444358a331a56606
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Access Statistics for this article

Energy Economics is edited by R. S. J. Tol and J. P. Weyant

More articles in Energy Economics from Elsevier
Series data maintained by Heidi Boesdal ().