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Efficient provision of electricity for the United States and Switzerland

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  • Boris Krey

    ()
    (Department of Economics, University of Zurich)

  • Philippe K. Widmer

    ()
    (Department of Economics, University of Zurich)

  • Peter Zweifel

    ()
    (Department of Economics, University of Zurich)

Abstract

This study applies financial portfolio theory to determine efficient frontiers in the provision of electricity for the United States and Switzerland. Expected returns are defined by the rate of productivity increase of power generation (adjusted for external costs), volatility, by its standard deviation. Since unobserved productivity shocks are found to be correlated, Seemingly Unrelated Regression Estimation (SURE) is used to filter out the systematic component of the covariance matrix of the productivity changes. Results suggest that as of 2003, the feasible maximum expected return (MER) electricity portfolio for the United States contains more Coal, Nuclear, and Wind than actual but markedly less Gas and Oil. The minimum variance (MV) portfolio contains markedly more Oil, again more Coal, Nuclear, and Wind but almost no Gas. Regardless of the choice between MER and MV, U.S. utilities are found to lie substantially inside the efficient frontier. This is even more true of their Swiss counterparts, likely due to continuing regulation of electricity markets.

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File URL: http://www.soi.uzh.ch/research/wp/2008/wp0812.pdf
File Function: first version, 2008
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Bibliographic Info

Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0812.

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Length: 24 pages
Date of creation: Oct 2008
Date of revision: Dec 2011
Handle: RePEc:soz:wpaper:0812

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Keywords: Efficiency frontier; energy; electricity; portfolio theory; Seemingly Unrelated Regression Estimation (SURE);

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