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Efficient Electricity Portfolios for Switzerland and the United States

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  • Boris Krey

    ()
    (Socioeconomic Institute, University of Zurich)

  • Peter Zweifel

    ()
    (Socioeconomic Institute, University of Zurich)

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    Abstract

    This study applies financial portfolio theory to determine efficient electricity-generating technology mixes for Switzerland and the United States. Expected returns are given by the (negative of the) rate of increase of power generation cost. Volatility of returns relates to the standard deviation of the cost increase associated with the portfolio, which contains Nuclear, Run of river, Storage hydro and Solar in the case of Switzerland, and Coal, Nuclear, Gas, Oil, and Wind in the case of the United States. Since shocks in generation costs are found to be correlated, the seemingly unrelated regression estimation (SURE) method is applied for filtering out the systematic component of the covariance matrix of the cost changes. Results suggest that at observed generation costs in 2003, the maximum expected return (MER) portfolio for Switzerland would call for a shift towards Nuclear and Solar, and therefore away from Run of river and Storage hydro. By way of contrast, the minimum variance (MV) portfolio mainly contains Nuclear power and Storage hydro. The 2003 MER portfolio for the United States contains Coal generated electricity and Wind, while the MV alternative combines Coal, Nuclear, Oil and Wind. Interestingly, Gas does not play any role in the determination of efficient electricity portfolios in the United States.

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    File URL: http://www.soi.uzh.ch/research/wp/2006/wp0602.pdf
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    Bibliographic Info

    Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0602.

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    Length: 25 pages
    Date of creation: Feb 2006
    Date of revision:
    Handle: RePEc:soz:wpaper:0602

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    Keywords: energy; electricity; portfolio theory; efficiency frontier; seemingly unrelated regression estimations (SURE);

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    References

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    1. Dennis L. Gärtner & Daniel Halbheer, 2008. "Are There Waves in Merger Activity After All?," Working Papers 0092, University of Zurich, Institute for Strategy and Business Economics (ISU).
    2. Stefan Boes & Markus Lipp & Rainer Winkelmann, 2005. "Money Illusion Under Test," SOI - Working Papers 0514, Socioeconomic Institute - University of Zurich.
    3. Mahler, Philippe & Winkelmann, Rainer, 2004. "Single Motherhood and (Un)Equal Educational Opportunities: Evidence for Germany," IZA Discussion Papers 1391, Institute for the Study of Labor (IZA).
    4. Yves Schneider & Peter Zweifel, 2005. "Spatial Effects in Willingness-to-Pay: The Case of Two Nuclear Risks," SOI - Working Papers 0502, Socioeconomic Institute - University of Zurich, revised Sep 2007.
    5. Lalive, Rafael & Schmutzler, Armin, 2005. "Competition for Railway Markets: The Case of Baden-Württemberg," CEPR Discussion Papers 5396, C.E.P.R. Discussion Papers.
    6. Bühler, Stefan & Schmutzler, Armin, 2003. "Who Integrates?," CEPR Discussion Papers 4066, C.E.P.R. Discussion Papers.
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    Cited by:
    1. Delarue, Erik & De Jonghe, Cedric & Belmans, Ronnie & D'haeseleer, William, 2011. "Applying portfolio theory to the electricity sector: Energy versus power," Energy Economics, Elsevier, vol. 33(1), pages 12-23, January.
    2. Madlener, Reinhard & Wenk, Christioph, 2008. "Efficient Investment Portfolios for the Swiss Electricity Supply Sector," FCN Working Papers 2/2008, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    3. Locatelli, Giorgio & Mancini, Mauro, 2011. "Large and small baseload power plants: Drivers to define the optimal portfolios," Energy Policy, Elsevier, vol. 39(12), pages 7762-7775.
    4. Gustavo A. Marrero & Luis A. Puch & Francisco J. Ramos-Real, 2013. "Mean-variance portfolio methods for energy policy risk management," Documentos de Trabajo del ICAE 2013-41, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    5. Westner, Günther & Madlener, Reinhard, 2010. "The benefit of regional diversification of cogeneration investments in Europe: A mean-variance portfolio analysis," Energy Policy, Elsevier, vol. 38(12), pages 7911-7920, December.
    6. Fernando de Llano Paz & Anxo Calvo Silvosa & Martín Portos García, 2012. "The Problem of Determining the Energy Mix: from the Portfolio Theory to the Reality of Energy Planning in the Spanish Case," European Research Studies Journal, European Research Studies Journal, vol. 0(Special I), pages 3-30.
    7. 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.
    8. Madlener, Reinhard & Glensk, Barbara & Weber, Veronika, 2011. "Fuzzy Portfolio Optimization of Onshore Wind Power Plants," FCN Working Papers 10/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Jul 2014.
    9. Gotham, Douglas & Muthuraman, Kumar & Preckel, Paul & Rardin, Ronald & Ruangpattana, Suriya, 2009. "A load factor based mean-variance analysis for fuel diversification," Energy Economics, Elsevier, vol. 31(2), pages 249-256, March.

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