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Mean-variance portfolio methods for energy policy risk management

Author

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  • Marrero, Gustavo A.
  • Puch, Luis A.
  • Ramos-Real, Francisco J.

Abstract

The risks associated with current and prospective costs of different energy technologies are crucial in assessing the efficiency of the energy mix. However, energy policy typically relies on the evolution of average costs, neglecting the covariances in the costs of the different energy technologies in the mix. The Mean-Variance Portfolio Theory is implemented to evaluate jointly the average costs and the associated volatility of alternative energy combinations. In addition systematic and non-systematic risks associated to the energy technologies are computed based on a Capital Asset Pricing Model and considering time varying betas. It is shown that both electricity generation and fuel use imply risks that are idiosyncratic and with relevant implications for energy and environmental policy.

Suggested Citation

  • Marrero, Gustavo A. & Puch, Luis A. & Ramos-Real, Francisco J., 2015. "Mean-variance portfolio methods for energy policy risk management," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 246-264.
    • Handle: RePEc:eee:reveco:v:40:y:2015:i:c:p:246-264
    DOI: 10.1016/j.iref.2015.02.013
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    More about this item

    Keywords

    Mean-variance; CAPM model; Energy risks; Energy mix; Energy policy;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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