Analytical Methods for Energy Diversity and Security (eBook)

Front Cover 1
Analytical Methods for Energy Diversity and Security 4
Copyright Page 5
Contents 6
Preface 14
Foreword 16
Foreword 2 18
Reader's Guide 20
Introduction: Analytical Approaches to Quantify and Value Fuel Mix Diversity 26
1 Introduction 26
2 Defining the diversity of the electricity system 27
2.1 Diversity and resilience to supply shocks 27
2.2 Diversity reduces the macroeconomic sensitivity to oil and gas prices 29
3 Quantifying and valuing the benefits of diversity 32
3.1 Quantifying fuel mix diversity 32
3.2 From quantification to valuation of fuel mix diversity 34
3.2.1 Mean-variance portfolio theory 35
3.2.2 Dynamic valuation approaches: the option value of diversity 38
4 Conclusions 41
References 42
Part I: Assessing Risks, Costs and Fuel Mix Diversity for Electric Utilities 44
Chapter 1 Diversity and Sustainable Energy Transitions: Multicriteria Diversity Analysis of Electricity Portfolios 46
1.1 Diversity, security, sustainability and wider energy policy 46
1.2 General properties of energy diversity: variety, balance and disparity 51
1.3 Aggregating, accommodating and articulating different aspects of energy diversity 56
1.4 A novel diversity heuristic for strategic appraisal of energy portfolios 62
1.5 Articulating energy diversity with other aspects of strategic performance 64
1.6 Conclusion 68
References 69
Chapter 2 The Value of Renewable Energy as a Hedge Against Fuel Price Risk: Analytical Contributions from Economic and Finance Theory 74
2.1 Introduction 74
2.2 Renewable energy reduces exposure to natural gas price risk 77
2.2.1 Methodology 78
2.2.2 Empirical findings of a premium 79
2.2.3 Potential explanations for empirical premiums 81
2.2.4 Implications 89
2.3 Renewable energy reduces natural gas prices 89
2.3.1 A cursory review of economic theory 90
2.3.2 Review of previous studies 92
2.3.3 Summary of implied inverse price elasticities of supply 97
2.3.4 Benchmarking elasticities against other models and empirical estimates 98
2.4 Conclusions 99
References 100
Chapter 3 Using Portfolio Theory to Value Power Generation Investments 104
3.1 Introduction 104
3.2 Capturing risk in power investment valuation techniques 105
3.3 Applying portfolio optimization to power investment choices 107
3.4 Conclusion 111
References 111
Chapter 4 Use of Real Options as a Policy-Analysis Tool 112
4.1 Relationship between portfolio theory and real options theory 112
4.2 Electricity price risk 115
4.3 Evaluating risk using real options 117
4.3.1 Toward an intuitive understanding of real options 118
4.3.2 Mathematical formulation 120
4.4 Case study: CO[sub(2)] and fuel price risks 121
4.5 Conclusions on the benefits and limitations of real options 124
References 126
Part II: Applying Portfolio Theory to Identify Optimal Power Generation Portfolios 128
Chapter 5 Efficient Electricity Generating Portfolios for Europe: Maximizing Energy Security and Climate Change Mitigation 130
5.1 Introduction 131
5.2 Data needed for computing optimal electricity generating portfolios 131
5.2.1 Technology generating cost 132
5.2.2 Technology risk estimates 133
5.2.3 Correlation coefficients 135
5.2.4 Total technology cost and risk 136
5.3 Portfolio optimization of EU electricity generating mix 139
5.3.1 Efficient multitechnology electricity portfolios: an illustration 139
5.3.2 Efficient multitechnology electricity portfolios for 2020: results 140
5.3.3 A summary of key results 146
5.4 An eclectic view on factors influencing optimal electricity mixes 149
5.4.1 The role of nuclear power 149
5.4.2 Efficient electricity portfolios that minimize CO[sub(2)] emissions 150
5.4.3 The effect of upper limits on technology shares 150
5.4.4 The effect of pricing CO[sub(2)] emissions 151
5.5 Summary and conclusions 152
References 154
Further reading 155
Appendix 158
Chapter 6 Portfolio Analysis of the Future Dutch Generating Mix 160
6.1 Introduction 161
6.2 Theoretical framework 161
6.3 The Dutch generating mix in 2030 165
6.3.1 The Strong Europe (SE) scenario 166
6.3.2 The Global Economy (GE) scenario 169
6.4 Policy implications 173
6.5 Conclusions 175
References 178
Appendix A: Input assumptions 178
Appendix B: Technology characteristics 180
Chapter 7 The Role of Wind Generation in Enhancing Scotland's Energy Diversity and Security: A Mean-Variance Portfolio Optimization of Scotland's Generating Mix 182
7.1 Least-cost versus portfolio-based approaches in generation planning 183
7.1.1 Portfolio-based planning for electricity generation 184
7.2 Portfolio optimization of Scotland's generating mix 185
7.2.1 The base case 186
7.2.2 Case II: accelerated (minimum 10%) offshore wind deployment 188
7.2.3 Case III: higher 'current outlook' natural gas prices 189
7.3 Conclusions: implications for Scotland's capacity planning 191
References 193
Further reading 193
Chapter 8 Generation Portfolio Analysis for a Carbon Constrained and Uncertain Future 194
8.1 Introduction 195
8.2 Generation options and portfolio optimization 196
8.2.1 Generator inputs 196
8.2.2 Fuel prices 196
8.2.3 Generation adequacy 196
8.2.4 Least-cost portfolio optimization 198
8.3 Carbon costs and the role of wind generation 198
8.3.1 Least-cost generation portfolio results 198
8.3.2 Emissions 200
8.3.3 Role of wind generation in portfolios 201
8.3.4 Effect of increasing wind capacity 201
8.4 Uncertainty and portfolio diversification 202
8.4.1 Background 202
8.4.2 Diversity 203
8.4.3 All-Ireland portfolio illustration 204
8.4.4 Insuring diversity in generation portfolios 206
8.5 Conclusions 206
References 207
Chapter 9 The Economics of Renewable Resource Credits 210
9.1 Introduction 210
9.2 Tradable green certificates in the electricity market 214
9.2.1 The consumer's problem 214
9.2.2 Market demand 217
9.2.3 Supply and market equilibrium 218
9.2.4 Effects of tradable green certificates 218
9.3 Government intervention in the green power market 219
9.3.1 The goal of environmental policy 219
9.3.2 Government intervention with a fixed budget 220
9.3.3 Traditional producer and consumer subsidies financed from general revenue 220
9.3.4 Government direct purchase of tradable green certificates, financed from general revenue 221
9.3.5 Comparison of policies 222
9.4 Institutional considerations and discussion 223
9.4.1 Alternative forms of the tradable green certificate market 223
9.4.2 Maintaining public trust 224
9.4.3 Efficiency issues 225
References 227
Appendix: Comparative statics results 228
Part III: Frontier Applications of the Mean-Variance Optimization Model for Electric Utilities Planning 234
Chapter 10 Efficient and Secure Power for the USA and Switzerland 236
10.1 Introduction 237
10.2 Literature review 238
10.3 Methodology 240
10.3.1 Real asset portfolio estimation 240
10.3.2 Seemingly unrelated regression estimation 243
10.3.3 Shannon–Wiener index 244
10.3.4 Herfindahl–Hirschman index 245
10.4 Efficient US and Swiss power generation frontiers in 2003 245
10.4.1 The data 245
10.4.2 Actual mix of power generation as of 2003 248
10.4.3 SURE results for the USA and Switzerland 248
10.4.4 Efficient power generation frontiers 251
10.4.5 Supply security 256
10.5 Conclusions 259
References 260
Chapter 11 Portfolio Optimization and Utilities' Investments in Liberalized Power Markets 262
11.1 Introduction 263
11.2 Diversification in liberalized electricity markets 264
11.2.1 Fuel mix diversification and corporate strategy 264
11.2.2 The lack of financial risk management instruments in the electricity industry 265
11.2.3 From macroeconomic to microeconomic diversification incentives 266
11.2.4 Technology diversification and the consumer interest 268
11.3 Using mean-variance portfolio theory to identify optimal generation portfolios 270
11.3.1 A two-step simulation framework with portfolio optimization 271
11.3.2 Net present value Monte Carlo simulation results 275
11.4 Optimal base-load generation portfolios in liberalized electricity markets 278
11.4.1 The impact of correlation between fuel, carbon dioxide and electricity prices 279
11.4.2 The impact of long-term fixed-price power purchase agreements on optimal generation portfolios 281
11.4.3 The impact of the cost of capital on optimal generation portfolios 284
11.5 Conclusion and policy implications 285
References 288
Chapter 12 Risk Management in a Competitive Electricity Market 290
12.1 Introduction 290
12.2 Electricity markets and pricing systems 292
12.3 Overview of the framework 293
12.4 Risk control 294
12.4.1 General case: risk-control strategy for a normal conservative Genco 294
12.4.2 Discussion: risk-control strategies for more conservative Gencos and less conservative Gencos 297
12.5 Risk assessment 297
12.5.1 Risk assessment technique 297
12.5.2 Application of value at risk in trading scheduling 298
12.6 Example 299
12.6.1 Profit characteristics 299
12.6.2 Simulation results 301
12.7 Conclusion 304
References 305
Chapter 13 Application of Mean-Variance Analysis to Locational Value of Generation Assets 306
13.1 Introduction 306
13.2 Simulation methodology 308
13.2.1 Load simulation scenario 309
13.2.2 Linear programming optimal power flow and locational marginal price 309
13.2.3 Constructing the efficient frontier and finding optimum investment buses 310
13.2.4 Portfolio selection 310
13.3 Simulation results 311
13.4 Adding generators 312
13.5 Optimal investment strategy 313
13.6 Conclusion 315
References 316
Appendix A: Formal derivation of the portfolio frontier 316
Appendix B 317
Chapter 14 Risk, Embodied Technical Change and Irreversible Investment Decisions in UK Electricity Production: An Optimum Technology Portfolio Approach 318
14.1 Introduction 319
14.2 Literature review 320
14.3 The vintage portfolio model 324
14.3.1 Model outline 324
14.3.2 Vintage portfolios versus standard mean-variance portfolios 326
14.3.3 Modelling details 327
14.4 Simulation results 332
14.4.1 Technology characterization 332
14.4.2 Simulation runs 334
14.4.3 Fuel price variance 342
14.4.4 Technological variance 342
14.5 Summary and conclusion 344
References 345
Index 348
A 348
B 348
C 348
D 350
E 351
F 351
G 352
H 353
I 353
J 353
K 353
L 353
M 353
N 354
O 354
P 355
Q 356
R 356
S 357
T 357
U 358
V 358
W 358
Shimon Awerbuch Biography 360
Charity 362
About the Editors 364
Color Plates 366