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Risk-Return Incentives in Liberalised Electricity Markets

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  • Richard S.J. Tol

    ()
    (Department of Economics, University of Sussex, UK
    Institute for Environmental Studies, Department of Spatial Economics, Vrije Universiteit, Amsterdam, The Netherlands)

  • Muireann Lynch

    ()
    (Electricity Research Centre, University College, Dublin, Ireland)

  • Aonghus Shortt

    (Electricity Research Centre, University College, Dublin, Ireland)

  • Mark O’Malley

    (Electricity Research Centre, University College, Dublin, Ireland)

Abstract

We employ Monte Carlo analysis to determine the distribution of returns for various electricity generation technologies. Costs and revenues for each technology are arrived by means of a sophisticated unit commitment and economic dispatch algorithm. The results show that small amounts of coal investment along with high investment in advanced CCGT can reduce the risk of baseload-only portfolios, while flexible generation technologies appear on the efficient frontier when all technology types are considered. Diversification incentives regarding operational considerations dominate over incentives to diversify between fuel types

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Bibliographic Info

Paper provided by Department of Economics, University of Sussex in its series Working Paper Series with number 4012.

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Date of creation: Oct 2012
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Handle: RePEc:sus:susewp:4012

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Keywords: Power generation; mean-variance portfolio;

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  1. H. Brett Humphreys & Katherine T. McClain, 1998. "Reducing the Impacts of Energy Price Volatility Through Dynamic Portfolio Selection," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 3), pages 107-131.
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  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, Elsevier, vol. 30(4), pages 1831-1849, July.
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  6. Roques, Fabien & Hiroux, Céline & Saguan, Marcelo, 2010. "Optimal wind power deployment in Europe--A portfolio approach," Energy Policy, Elsevier, Elsevier, vol. 38(7), pages 3245-3256, July.
  7. Hobbs, Benjamin F., 1995. "Optimization methods for electric utility resource planning," European Journal of Operational Research, Elsevier, Elsevier, vol. 83(1), pages 1-20, May.
  8. Delarue, Erik & De Jonghe, Cedric & Belmans, Ronnie & D'haeseleer, William, 2011. "Applying portfolio theory to the electricity sector: Energy versus power," Energy Economics, Elsevier, Elsevier, vol. 33(1), pages 12-23, January.
  9. Troy, Niamh & Denny, Eleanor & O'Malley, Mark, 2010. "Base-load cycling on a system with significant wind penetration," MPRA Paper 34848, University Library of Munich, Germany.
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Cited by:
  1. Muireann Á. Lynch & Richard Tol & Mark J. O’Malley, 2014. "Minimising costs and variability of electricity generation by means of optimal electricity interconnection utilisation," Working Paper Series, Department of Economics, University of Sussex 6814, Department of Economics, University of Sussex.

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