On the economic optimization of national power generation mix in Iran: A Markowitz' portfolio-based approach

Arash Farnoosh
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Arash Farnoosh: IFPEN - IFP Energies nouvelles

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Abstract: Energy planning can be characterized as an investment-decision problem. Investors use many different methods for treating such problems. One of the most common methods is based on the Markowitz's portfolio theory by which investors try to manage risk and maximize their portfolio performance under variety of volatile economic outcomes. This work explains essential portfolio theory insights and analysis their application in an oil and gas producing country. We will illustrate how different electricity generation mixes can be influenced by additional share of nuclear and renewable sources. In comparison to the fossil dominated mixes, efficient power generation portfolios can dramatically reduce the generation costs while containing larger shares of decarbonized power units in the mix. The optimal results for the Iranian generation mix demonstrate that compared to the fossil-based mixes, there exist many generating mix structures with larger non-fossil shares (both nuclear and renewable) at equal or even lower expected costs and risks. Moreover, if we also take into consideration the export revenues of released fossil fuels (opportunity cost of fuels) this conclusion becomes even more affirmative. Moreover, our portfolio model analysis reflects the cost inter-relationship (co-variances) among generating alternatives and their impact on the final portfolio costs and risks. The results illustrate that the typical Iranian gas and fuel generating portfolio offers little diversification. While it may insulate from random risk, such as Iranian nuclear issues, it provides little insulation from the systematic risk of oil and gas price movements, which have historically been highly correlated.

Date: 2016-04
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