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Efficient Investment Portfolios for the Swiss Electricity Supply Sector

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Author Info

  • Madlener, Reinhard

    ()
    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

  • Wenk, Christioph

    ()
    (Swiss Banking Institute, University of Zurich)

Abstract

In this paper, we investigate existing and possible future power generation capacities in Switzerland from a risk-return perspective, using the Mean-Variance Portfolio Theory of Markowitz (1952). The study covers power generation technologies currently in operation, such as nuclear power, storage hydro power and run-of-river hydro power plants, and two new renewable energy technologies (photovoltaics and wind). Additionally, natural gas combined cycle (NGCC) technology, a possible extension to the current Swiss portfolio, is assessed. The technology-specific risks considered include electricity spot market price, production capacity and reliability, fuel cost, funding liabilities, and operation and maintenance outlays. These factors are implemented in a Net Present Value (NPV) model and Monte Carlo simulations are applied to assess each investment alternative. The lifetime-adjusted average return, together with the return-specific variance, forms the basis for the portfolio optimization conducted in the second stage of the analysis. The minimum variance (or maximum return) optimization is performed separately for base-load and peak-load technology portfolios. By defining different scenarios for the upper and lower bound for each technology's share, we simulate different situations, enabling us both, to explain the risk-return profile of the current technology mix, and to make predictions for future portfolios. Our NPV calculations are in line with currently observed returns and, by imposing some reasonable restrictions, the model performs sufficiently well in terms of explaining past portfolio compositions. Moreover, our predicted optimal outcome matches quite nicely with the debated options for enlarging power production in Switzerland.

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Bibliographic Info

Paper provided by E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) in its series FCN Working Papers with number 2/2008.

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Length: 43 pages
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:ris:fcnwpa:2008_002

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Web page: http://www.eonerc.rwth-aachen.de/fcn
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Keywords: Portfolio optimization; Peak load demand; Electricity supply; Switzerland;

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References

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  1. Shimon Awerbuch, 2006. "Portfolio-Based Electricity Generation Planning: Policy Implications For Renewables And Energy Security," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 11(3), pages 693-710, May.
  2. Roques, F.A. & Nuttall, W.J. & Newbery, D.M., 2006. "Using Probabilistic Analysis to Value Power Generation Investments Under Uncertainty," Cambridge Working Papers in Economics 0650, Faculty of Economics, University of Cambridge.
  3. Roques, Fabien A. & Newbery, David M. & Nuttall, William J., 2008. "Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach," Energy Economics, Elsevier, vol. 30(4), pages 1831-1849, July.
  4. Boris Krey & Peter Zweifel, 2006. "Efficient Electricity Portfolios for Switzerland and the United States," SOI - Working Papers 0602, Socioeconomic Institute - University of Zurich.
  5. Bar-Lev, Dan & Katz, Steven, 1976. "A Portfolio Approach to Fossil Fuel Procurement in the Electric Utility Industry," Journal of Finance, American Finance Association, vol. 31(3), pages 933-47, June.
  6. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  7. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
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Citations

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Cited by:
  1. Achtnicht, Martin & Madlener, Reinhard, 2012. "Factors influencing German house owners' preferences on energy retrofits," ZEW Discussion Papers 12-042, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "An Evaluation of Attribute Anchoring Bias in a Choice Experimental Setting," FCN Working Papers 6/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  3. Michelsen, Carl Christian & Madlener, Reinhard, 2011. "Homeowners' Motivation to Adopt a Residential Heating System: A Principal-Component Analysis," FCN Working Papers 17/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Jan 2013.
  4. Bruns, Stephan B. & Gross, Christian, 2013. "What if energy time series are not independent? Implications for energy-GDP causality analysis," Energy Economics, Elsevier, vol. 40(C), pages 753-759.
  5. Hackbarth, André & Madlener, Reinhard, 2011. "Consumer Preferences for Alternative Fuel Vehicles: A Discrete Choice Analysis," FCN Working Papers 20/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  6. Westner, Günther & Madlener, Reinhard, 2009. "The Benefit of Regional Diversification of Cogeneration Investments in Europe: A Mean-Variance Portfolio Analysis," FCN Working Papers 5/2009, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Mar 2010.
  7. Daniel Ziegler & Katrin Schmitz & Christoph Weber, 2012. "Optimal electricity generation portfolios," Computational Management Science, Springer, vol. 9(3), pages 381-399, August.
  8. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Challenges in the Evaluation of Ultra-Long-Lived Projects: Risk Premia for Projects with Eternal Returns or Costs," FCN Working Papers 13/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  9. Palmer, Johannes & Sorda, Giovanni & Madlener, Reinhard, 2013. "Modeling the Diffusion of Residential Photovoltaic Systems in Italy: An Agent-based Simulation," FCN Working Papers 9/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  10. Kraas, Birk & Schroedter-Homscheidt, Marion & Pulvermüller, Benedikt & Madlener, Reinhard, 2011. "Economic Assessment of a Concentrating Solar Power Forecasting System for Participation in the Spanish Electricity Market," FCN Working Papers 12/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  11. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Optimal Power Generation Investment: Impact of Technology Choices and Existing Portfolios for Deploying Low-Carbon Coal Technologies," FCN Working Papers 12/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  12. Georg Erber & Reinhard Madlener, 2009. "Impact of ICT and Human Skills on the European Financial Intermediation Sector," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  13. Omann, Ines & Kowalski, Katharina & Bohunovsky, Lisa & Madlener, Reinhard & Stagl, Sigrid, 2008. "The Influence of Social Preferences on Multi-Criteria Evaluation of Energy Scenarios," FCN Working Papers 3/2008, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  14. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "The Impact of Green Framing on Consumers’ Valuations of Energy-Saving Measures," FCN Working Papers 7/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  15. Ghosh, Gaurav & Shortle, James, 2012. "Managing Pollution Risk through Emissions Trading," FCN Working Papers 1/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  16. Sorda, Giovanni & Madlener, Reinhard, 2012. "Cost-Effectiveness of Lignocellulose Biorefineries and their Impact on the Deciduous Wood Markets in Germany," FCN Working Papers 8/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  17. Rohlfs, Wilko & Madlener, Reinhard, 2012. "Assessment of Clean-Coal Strategies: The Questionable Merits of Carbon Capture-Readiness," FCN Working Papers 18/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  18. Dergiades, Theologos & Madlener, Reinhard & Christofidou, Georgia, 2012. "The Nexus between Natural Gas Spot and Futures Prices at NYMEX: Do Weather Shocks and Non-Linear Causality in Low Frequencies Matter?," FCN Working Papers 17/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Sep 2013.
  19. Rohlfs, Wilko & Madlener, Reinhard, 2011. "Multi-Commodity Real Options Analysis of Power Plant Investments: Discounting Endogenous Risk Structures," FCN Working Papers 22/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  20. Michelsen, Carl Christian & Madlener, Reinhard, 2011. "Homeowners' Preferences for Adopting Residential Heating Systems: A Discrete Choice Analysis for Germany," FCN Working Papers 9/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  21. Bernstein, Ronald & Madlener, Reinhard, 2011. "Responsiveness of Residential Electricity Demand in OECD Countries: A Panel Cointegation and Causality Analysis," FCN Working Papers 8/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).

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