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Applying portfolio theory to the electricity sector: Energy versus power

  • Delarue, Erik
  • De Jonghe, Cedric
  • Belmans, Ronnie
  • D'haeseleer, William
Registered author(s):

    Portfolio theory has found its way in numerous applications for optimizing the electricity generation mix of a particular region. Existing models, however, consider typically a single time period and correspondingly do not properly account for actual dispatch constraints and energy sources with a non-dispatchable, variable output. This paper presents a portfolio theory model that explicitly distinguishes between installed capacity (power), electricity generation (energy) and actual instantaneous power delivery. This way, the variability of wind power and ramp limits of conventional power plants are correctly included in the investment optimization. The model is written as a quadratically constrained programming problem and illustrated in a case study. The results show that the introduction of wind power can be motivated to lower the risk on generation cost, albeit to smaller levels than typically reported in the literature. This wind power deployment further requires the need for sufficiently rampable technologies, to deal with its fluctuating output.

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    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 33 (2011)
    Issue (Month): 1 (January)
    Pages: 12-23

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    Handle: RePEc:eee:eneeco:v:33:y:2011:i:1:p:12-23
    Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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    1. Huang, Yun-Hsun & Wu, Jung-Hua, 2008. "A portfolio risk analysis on electricity supply planning," Energy Policy, Elsevier, vol. 36(2), pages 627-641, February.
    2. Boris Krey & Peter Zweifel, 2006. "Efficient Electricity Portfolios for Switzerland and the United States," SOI - Working Papers 0602, Socioeconomic Institute - University of Zurich.
    3. repec:ner:tilbur:urn:nbn:nl:ui:12-3130619 is not listed on IDEAS
    4. 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.
    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. 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.
    7. Huisman, R. & Mahieu, R.J. & Schlichter, F., 2007. "Electricity Portfolio Management: Optimal Peak / Off-Peak Allocations," ERIM Report Series Research in Management ERS-2007-089-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    8. 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.
    9. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
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