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Issues in the determination of the optimal portfolio of electricity supply options


  • Hickey, Emily A.
  • Lon Carlson, J.
  • Loomis, David


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.

Suggested Citation

  • Hickey, Emily A. & Lon Carlson, J. & Loomis, David, 2010. "Issues in the determination of the optimal portfolio of electricity supply options," Energy Policy, Elsevier, vol. 38(5), pages 2198-2207, May.
  • Handle: RePEc:eee:enepol:v:38:y:2010:i:5:p:2198-2207

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    References listed on IDEAS

    1. 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.
    2. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    3. 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.
    4. 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.
    5. 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.
    6. Costello, Ken, 2005. "A Perspective on Fuel Diversity," The Electricity Journal, Elsevier, vol. 18(4), pages 28-47, May.
    7. 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.
    8. Gitelman, Gary, 2002. "Use of Real Options in Asset Valuation," The Electricity Journal, Elsevier, vol. 15(9), pages 58-71, November.
    9. Hanser, Philip & Graves, Frank, 2007. "Utility Supply Portfolio Diversity Requirements," The Electricity Journal, Elsevier, vol. 20(5), pages 22-32, June.
    10. 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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    Cited by:

    1. de-Llano Paz, Fernando & Antelo, Susana Iglesias & Calvo Silvosa, Anxo & Soares, Isabel, 2014. "The technological and environmental efficiency of the EU-27 power mix: An evaluation based on MPT," Energy, Elsevier, vol. 69(C), pages 67-81.
    2. Chuang, Ming Chih & Ma, Hwong Wen, 2013. "Energy security and improvements in the function of diversity indices—Taiwan energy supply structure case study," Renewable and Sustainable Energy Reviews, Elsevier, vol. 24(C), pages 9-20.
    3. Naraharisetti, Pavan Kumar & Karimi, I.A. & Anand, Abhay & Lee, Dong-Yup, 2011. "A linear diversity constraint – Application to scheduling in microgrids," Energy, Elsevier, vol. 36(7), pages 4235-4243.
    4. Kharbach, Mohammed, 2016. "Diversification criteria for power systems," Energy Policy, Elsevier, vol. 90(C), pages 183-186.
    5. deLlano-Paz, Fernando & Martínez Fernandez, Paulino & Soares, Isabel, 2016. "Addressing 2030 EU policy framework for energy and climate: Cost, risk and energy security issues," Energy, Elsevier, vol. 115(P2), pages 1347-1360.
    6. repec:eee:appene:v:205:y:2017:i:c:p:1364-1383 is not listed on IDEAS
    7. repec:eee:rensus:v:77:y:2017:i:c:p:636-651 is not listed on IDEAS
    8. Fernando deLlano-Paz & Paulino Martinez Fernandez & Isabel Soares, 2016. "The effects of different CCS technological scenarios on EU low-carbon generation mix," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 18(5), pages 1477-1500, October.
    9. repec:eee:appene:v:207:y:2017:i:c:p:465-476 is not listed on IDEAS
    10. Nahmmacher, Paul & Schmid, Eva & Pahle, Michael & Knopf, Brigitte, 2016. "Strategies against shocks in power systems – An analysis for the case of Europe," Energy Economics, Elsevier, vol. 59(C), pages 455-465.

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