Optimal fuel-mix in CHP plants under a stochastic permit price: Risk-neutrality versus risk-aversion
AbstractThis 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.
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Bibliographic InfoArticle provided by Elsevier in its journal Energy Policy.
Volume (Year): 38 (2010)
Issue (Month): 2 (February)
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Web page: http://www.elsevier.com/locate/enpol
Emissions trading Fuel substitution Risk-aversion;
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