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Optimal fuel-mix in CHP plants under a stochastic permit price: Risk-neutrality versus risk-aversion

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  • Lappi, Pauli
  • Ollikka, Kimmo
  • Ollikainen, Markku

Abstract

This paper studies the optimal fuel-mix of a CHP producer under emission permit price risk. The producer's multi-fuel plant uses two CO2-intensive fuels and one clean fuel. Using a mean-variance framework we develop three models. The models are divided into spot-models (risk neutral and risk averse cases) and a forward-model (risk averse case). We derive the effects of price risk on optimal fuel use. An increase in price risk can in fact increase the use of CO2-intensive fuel in the spot-model. In the forward-model, the production and financial decisions are separate. We also evaluate the risk-bearing behavior of seven Finnish CHP producers. We found that risk-neutrality describes behavior better than risk-aversion.

Suggested Citation

  • Lappi, Pauli & Ollikka, Kimmo & Ollikainen, Markku, 2010. "Optimal fuel-mix in CHP plants under a stochastic permit price: Risk-neutrality versus risk-aversion," Energy Policy, Elsevier, vol. 38(2), pages 1079-1086, February.
  • Handle: RePEc:eee:enepol:v:38:y:2010:i:2:p:1079-1086
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    References listed on IDEAS

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    Cited by:

    1. Krasovskii, Andrey & Khabarov, Nikolay & Obersteiner, Michael, 2016. "Fair pricing of REDD-based emission offsets under risk preferences and benefit-sharing," Energy Policy, Elsevier, vol. 96(C), pages 193-205.

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