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Valuing diversity in energy supply

  • Skea, Jim
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    There is renewed interest in the role of supply diversity in promoting energy security. This paper explores ways of valuing diversity. A possible incentive mechanism for promoting diversity which takes account of underlying "disparities" between different technology options is developed. The mechanism provides a way of trading off cost and diversity and results in an "efficient" cost-diversity frontier by analogy with financial portfolio theory. If all technologies are believed to be equally disparate, the appropriate mechanism is a "levy" imposed on market share. If the technologies are not equally disparate, the levy needs to be adjusted by technology-specific multipliers that take account of levels of disparity and patterns of market share. The analysis is applied to two stylised situations. In the long-run equilibrium case, the implications of both different patterns of disparity and different values attached to diversity are investigated. The paper also explores the implications of applying such a mechanism to the current Great Britain electricity system. The implications in terms of financial flows, for both the market as a whole and for individual operators, are investigated. Finally, the appropriateness of such a mechanism in the light of other policy goals, and possible future research directions, is discussed.

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    File URL: http://www.sciencedirect.com/science/article/B6V2W-4YP170B-1/2/45b562ba3302b11b862fbe66c72b991e
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    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 38 (2010)
    Issue (Month): 7 (July)
    Pages: 3608-3621

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    Handle: RePEc:eee:enepol:v:38:y:2010:i:7:p:3608-3621
    Contact details of provider: Web page: http://www.elsevier.com/locate/enpol

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    1. Fabien A. Roques & William J. Nuttall & David M. Newbery & Richard de Neufville & Stephen Connors, 2006. "Nuclear Power: A Hedge against Uncertain Gas and Carbon Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-24.
    2. Stirling, Andy, 2010. "Multicriteria diversity analysis: A novel heuristic framework for appraising energy portfolios," Energy Policy, Elsevier, vol. 38(4), pages 1622-1634, April.
    3. 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.
    4. Weitzman, M.L., 1992. "Diversity Functions," Harvard Institute of Economic Research Working Papers 1610, Harvard - Institute of Economic Research.
    5. Weitzman, M.L., 1991. "On Diversity," Harvard Institute of Economic Research Working Papers 1553, Harvard - Institute of Economic Research.
    6. Stirling, Andrew, 1994. "Diversity and ignorance in electricity supply investment : Addressing the solution rather than the problem," Energy Policy, Elsevier, vol. 22(3), pages 195-216, March.
    7. 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.
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