Optimal fuel-mix in CHP plants under a stochastic permit price: Risk-neutrality versus risk-aversion

Pauli Lappi, Kimmo Ollikka and Markku Ollikainen

Energy Policy, 2010, vol. 38, issue 2, 1079-1086

Abstract: This paper studies the optimal fuel-mix of a CHP producer under emission permit price risk. The producer's multi-fuel plant uses two CO2-intensive fuels and one clean fuel. Using a mean-variance framework we develop three models. The models are divided into spot-models (risk neutral and risk averse cases) and a forward-model (risk averse case). We derive the effects of price risk on optimal fuel use. An increase in price risk can in fact increase the use of CO2-intensive fuel in the spot-model. In the forward-model, the production and financial decisions are separate. We also evaluate the risk-bearing behavior of seven Finnish CHP producers. We found that risk-neutrality describes behavior better than risk-aversion.

Keywords: Emissions; trading; Fuel; substitution; Risk-aversion (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0301-4215(09)00819-2
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:enepol:v:38:y:2010:i:2:p:1079-1086

Access Statistics for this article

Energy Policy is currently edited by N. France

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