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Risk-Return Incentives in Liberalised Electricity Markets

  • Richard S.J. Tol


    (Department of Economics, University of Sussex, UK
    Institute for Environmental Studies, Department of Spatial Economics, Vrije Universiteit, Amsterdam, The Netherlands)

  • Muireann Lynch


    (Electricity Research Centre, University College, Dublin, Ireland)

  • Aonghus Shortt

    (Electricity Research Centre, University College, Dublin, Ireland)

  • Mark O’Malley

    (Electricity Research Centre, University College, Dublin, Ireland)

We employ Monte Carlo analysis to determine the distribution of returns for various electricity generation technologies. Costs and revenues for each technology are arrived by means of a sophisticated unit commitment and economic dispatch algorithm. The results show that small amounts of coal investment along with high investment in advanced CCGT can reduce the risk of baseload-only portfolios, while flexible generation technologies appear on the efficient frontier when all technology types are considered. Diversification incentives regarding operational considerations dominate over incentives to diversify between fuel types

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Paper provided by Department of Economics, University of Sussex in its series Working Paper Series with number 4012.

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Date of creation: Oct 2012
Date of revision:
Handle: RePEc:sus:susewp:4012
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  1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
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  6. Awerbuch, Shimon, 2000. "Investing in photovoltaics: risk, accounting and the value of new technology," Energy Policy, Elsevier, vol. 28(14), pages 1023-1035, November.
  7. 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 933-47, June.
  8. Troy, Niamh & Denny, Eleanor & O'Malley, Mark, 2010. "Base-load cycling on a system with significant wind penetration," MPRA Paper 34848, University Library of Munich, Germany.
  9. Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0601.
  10. H. Brett Humphreys & Katherine T. McClain, 1998. "Reducing the Impacts of Energy Price Volatility Through Dynamic Portfolio Selection," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 107-131.
  11. Roques, Fabien A. & Newbery, David M. & Nuttall, William J., 2008. "Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach," Energy Economics, Elsevier, vol. 30(4), pages 1831-1849, July.
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