Portfolio-Based Electricity Generation Planning: Policy Implications For Renewables And Energy Security
- 2.2k Downloads
Renewable generating technologies offer an effective means for climate change mitigation. Policy makers, however, are wary because of the widespread perception that these technologies cost more than conventional alternatives so that increasing their deployment will raise overall electricity generating costs.
Energy planning represents an investment-decision problem. Investors commonly evaluate such problems using portfolio theory to manage risk and maximize portfolio performance under a variety of unpredictable economic outcomes. Energy planners need to similarly abandon their reliance on traditional, “least-cost” stand-alone kWh generating cost measures and instead evaluate conventional and renewable energy sources on the basis of their portfolio cost – their cost contribution relative to their risk contribution to a mix of generating assets.
Energy security generally focuses on the threat of abrupt supply disruptions. This paper suggests a more profound aspect: mitigating fossil price volatility. An extensive body of research indicates that fossil volatility significantly disrupts the economies of consuming nations, potentially exacting hundreds of billions of dollars from the US and EU economies alone. Energy security is reduced when countries hold inefficient portfolios that are needlessly exposed to fossil price risks.
This paper describes essential portfolio-theory ideas and uses three case studies to illustrate how electricity-generating mixes can benefit from additional shares of wind, geothermal and other renewables. Compared to existing, fossil-dominated mixes, efficient portfolios reduce generating cost while including greater renewables shares in the mix thereby enhancing energy security. Though counter-intuitive, the idea that adding more costly renewables can actually reduce portfolio-generating cost is consistent with basic finance theory. An important implication is that in dynamic and uncertain environments, the relative value of generating technologies must be determined not by evaluating alternative resources, but by evaluating alternative resource portfolios.
Keywordscomparative electricity generating cost efficient portfolios energy diversity fossil risk mean-variance portfolio-theory renewables risk-return security
Unable to display preview. Download preview PDF.
- Awerbuch, S.: 2000, ‘Investing in Photovoltaics: Risk, Accounting and the value of new technology’, Energy Policy, Special Issue, 28(14) (November).Google Scholar
- Awerbuch, S.: 2000a, ‘Getting it right: The real cost impacts of a renewables portfolio standard’, Public Utilities Fortnightly, February 15, 2000.Google Scholar
- Awerbuch, S.: 1995, ‘New economic cost perspectives for valuing solar technologies,’ in Karl W. Böer (ed.), Advances in Solar Energy: An Annual Review of Research and Development, Vol. 10, Boulder: ASES, 1995.Google Scholar
- Awerbuch, S. and Berger, M.: 2003, Energy Security and Diversity in the EU: A Mean-Variance Portfolio Approach, IEA Report Number EET/2003/03, Paris: February http://library.iea.org/dbtw-wpd/textbase/papers/2003/port.pdf.
- Awerbuch, S. and Sauter, R.: 2005, ‘Exploiting the Oil-GDP effect to support renewables deployment,’ Energy Policy (forthcoming).Google Scholar
- Awerbuch, S., Stirling, A.C., Jansen, J. and Beurskens, L.: 2005, ‘Portfolio and diversity analysis of energy technologies using full-spectrum risk measures,’ in D. Bodde, K. Leggio and M. Taylor (eds.), Understanding and Managing Business Risk in the Electric Sector, Elsevier, forthcoming.Google Scholar
- Awerbuch, S., Jansen, J.C. and Beurskens, L.: August 2004, ‘Building Capacity for Portfolio-Based Energy Planning in Developing Countries,’ Final Report, Submitted to The Renewable Energy & Energy Efficiency Partnership (REEEP), and UNEP, London-Paris.Google Scholar
- Berger, M.: 2003, Portfolio Analysis of EU Electricity Generating Mixes and Its Implications for Renewables, Ph.D. Dissertation, Technischen Universität Wien, Vienna, March.Google Scholar
- Biewald, B., Woolf, T., Roschelle, A. and Steinhurst, W.: 2003, ‘Portfolio Management: How to Procure Electricity Resources to Provide Reliable, Low-Cost, and Efficient Electricity Services to All Retail Customers,’ Prepared for: The Regulatory Assistance Project and The Energy Foundation. Cambridge, MA: Synapse Energy, www.synapse-energy.com.
- Bolinger, M., Wiser, R. and Golove, W.: 2004, ‘Accounting for Fuel Price Risk When Comparing Renewable to Gas-Fired Generation: The role of forward natural gas prices’, Energy Policy.Google Scholar
- Brealey, R.A. and Myers, S.C.: 1994, Principles of Corporate Finance, McGraw Hill, or any edition.Google Scholar
- EU Green Paper: 2001, ‘Towards a European strategy for the security of energy supply.’Google Scholar
- Grubb, M., Butler, L. and Sinden, G.: 2004, ‘Diversity and Security in UK Electricity Generation: The Influence of Low Carbon Objectives,’ Department of Applied Economics, Cambridge University.Google Scholar
- Helfat, C.E.: 1988, Investment Choices in Industry, Cambridge, MIT Press.Google Scholar
- Humphreys, H.B. and McLain, K.T.: 1998, ‘Reducing The impacts of energy price volatility through dynamic portfolio selection’, Energy Journal 19(3).Google Scholar
- Jansen, J.C.: 2004, Policy support for renewable energy in the European Union: A review of the regulatory framework and suggestions for adjustment, Petten: ECN-I–03-002.Google Scholar
- Kleindorfer, P.R. and Li, L.: 2002, ‘Multi-Period VaR-Constrained Portfolio Optimization with Derivative Instruments and Applications to the Electric Power Sector’, Risk Management and Decision Processes Center, The Wharton School, University of Pennsylvania, Philadelphia, PA, 19104, October 9.Google Scholar
- Leiby, P.: 2002, ‘Oil Use and U.S. Energy Security Problems and Policy Responses,’ Washington DC: Symposium on U.S. Energy Security, Resources for the Future, January 28. http://www.rff.org/rff/Events/AST28/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=6474.
- Lind, R.C.: 1982, ‘A Primer on the major issues relating to the discount rate for evaluating national energy options,’ in C. Robert, Kenneth, A.L. et. al. (eds.), Discounting for Time and Risk in Energy Policy, DC: Resources for the Future, (Johns Hopkins University Press).Google Scholar
- Pacificorp: 2003, Integrated Resource Plan, http://www.pacificorp.com/File/File25682.pdf.
- Seitz, N. and Ellison, M.: 1995, Capital Budgeting and Long-Term Financing Decisions, Dryden Press.Google Scholar
- Springer, U. and Laurikka, H.: ‘Quantifying risks and risk correlations of investments in Climate Change Mitigation,’ IWOe Discussion paper No. 101, University of St. Gallen; ISBN 3-906502-98-8 www.iwoe.unisg.ch/org/iwo/web.nsf.
- Stirling, A.C.: 1996, On the Economics and Analysis of Diversity, Paper No. 28 Science Policy Research Unit (SPRU) University of Sussex, www.sussex.ac.uk/spru.
- Stirling, A.C.: 1994, ‘Diversity and ignorance’, Energy Policy.Google Scholar
- Toman, M.A.: 2002, ‘International oil security: Problems and policies’, Resources for the Future, Issue Brief No. 02–04, January.Google Scholar
- Union of Concerned Scientists: 2003, Renewable Energy Can Help Ease Natural Gas Crunch, www.ucsusa.org/clean_energy/renewable_energy/page.cfm?pageID=1370.
- Varian, H.: 1993, ‘A Portfolio of Nobel Laureates, Markowitz, Miller and Sharpe’, Journal of Economic Perspectives, 7(1), (Winter).Google Scholar