CO2 volatility impact on energy portfolio choice: A fully stochastic LCOE theory analysis

Carlo Lucheroni () and Carlo Mari

Applied Energy, 2017, vol. 190, issue C, 278-290

Abstract: Market based pricing of CO2 was designed to control CO2 emissions by means of the price level, since high CO2 price levels discourage emissions. In this paper, it will be shown that the level of uncertainty on CO2 market prices, i.e. the volatility of CO2 prices itself, has a strong influence not only on generation portfolio risk management but also on CO2 emissions abatement. A reduction of emissions can be obtained when rational power generation capacity investors decide that the capacity expansion cost risk induced jointly by CO2 volatility and fossil fuels prices volatility can be efficiently hedged adding to otherwise fossil fuel portfolios some nuclear power as a carbon free asset. This intriguing effect will be discussed using a recently introduced economic analysis tool, called stochastic LCOE theory. The stochastic LCOE theory used here was designed to investigate diversification effects on energy portfolios. In previous papers this theory was used to study diversification effects on portfolios composed of carbon risky fossil technologies and a carbon risk-free nuclear technology in a risk-reward trade-off frame. In this paper the stochastic LCOE theory will be extended to include uncertainty about nuclear power plant construction times, i.e. considering nuclear risky as well, this being the main uncertainty source of financial risk in nuclear technology. Two measures of risk will be used, standard deviation and CVaR deviation, to derive efficient frontiers for generation portfolios. Frontier portfolios will be analyzed in their implications on emissions control.

Keywords: Levelized cost of electricity; Nuclear power; Risk and deviation measures (search for similar items in EconPapers)
JEL-codes: G31 G32 L94 M21 Q40 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0306261916319080
Full text for ScienceDirect subscribers only

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

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:appene:v:190:y:2017:i:c:p:278-290

Ordering information: This journal article can be ordered from
http://www.elsevier.com/wps/find/journaldescription.cws_home/405891/bibliographic
http://www.elsevier. ... 405891/bibliographic

DOI: 10.1016/j.apenergy.2016.12.125

Access Statistics for this article

Applied Energy is currently edited by J. Yan

More articles in Applied Energy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().