Issues in the determination of the optimal portfolio of electricity supply options
In recent years a growing amount of attention has been focused on the need to develop a cost-effective portfolio of electricity supply options that provides society with a measure of protection from such factors as fuel price volatility and supply interruptions. A number of strategies, including portfolio theory, real options theory, and different measures of diversity have been suggested. In this paper we begin by first considering how we might characterize an optimal portfolio of supply options and identify a number of constraints that must be satisfied as part of the optimization process. We then review the strengths and limitations of each approach listed above. The results of our review lead us to conclude that, of the strategies we consider, using the concept of diversity to assess the viability of an electricity supply portfolio is most appropriate. We then provide an example of how a particular measure of diversity, the Shannon-Weiner Index, can be used to assess the diversity of the electricity supply portfolio in the state of Illinois, the region served by the Midwest Independent System Operator (MISO), and the continental United States.
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- Costello, Ken, 2005. "A Perspective on Fuel Diversity," The Electricity Journal, Elsevier, vol. 18(4), pages 28-47, May.
- 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 933-947, June.
- Frayer, Julia & Uludere, Nazli Z., 2001. "What Is It Worth? Application of Real Options Theory to the Valuation of Generation Assets," The Electricity Journal, Elsevier, vol. 14(8), pages 40-51, October.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- Grubb, M. & Butler, L. & Sinden, G., 2005.
"Diversity and Security in UK Electricity Generation: The Influence of Low Carbon Objectives,"
Cambridge Working Papers in Economics
0511, Faculty of Economics, University of Cambridge.
- Grubb, Michael & Butler, Lucy & Twomey, Paul, 2006. "Diversity and security in UK electricity generation: The influence of low-carbon objectives," Energy Policy, Elsevier, vol. 34(18), pages 4050-4062, December.
- Gitelman, Gary, 2002. "Use of Real Options in Asset Valuation," The Electricity Journal, Elsevier, vol. 15(9), pages 58-71, November.
- Hanser, Philip & Graves, Frank, 2007. "Utility Supply Portfolio Diversity Requirements," The Electricity Journal, Elsevier, vol. 20(5), pages 22-32, June.
- Andy Stirling & Go Yoshizawa & Tatsujiro Suzuki, 2009. "Electricity System Diversity in the UK and Japan - a Multicriteria Diversity Analysis," SPRU Working Paper Series 176, SPRU - Science and Technology Policy Research, University of Sussex.
- Andy Stirling, 2007. "A General Framework for Analysing Diversity in Science, Technology and Society," SPRU Working Paper Series 156, SPRU - Science and Technology Policy Research, University of Sussex.
- Costello, Ken, 2007. "Diversity of Generation Technologies: Implications for Decision-Making and Public Policy," The Electricity Journal, Elsevier, vol. 20(5), pages 10-21, June.
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