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Analyzing the suitability and role of modern portfolio theory for renewable energy planning

In: Handbook on the Economics of Renewable Energy

Author

Listed:
  • Fernando de Llano Paz
  • Javier Eduardo Afonso Arévalo
  • Guillermo Iglesias Gómez

Abstract

In this chapter, modern portfolio theory (MPT) (Markowitz, 1952) is presented as a valid and proven methodology for the evaluation of investment projects in electricity generation plants, in the field of energy planning. The MPT, based on the trade-off between the cost/risk of technologies, offers a quadratic optimisation model useful for designing the portfolio of technologies and associated energy resources in the medium to long term for any territory. Renewable energy sources for electricity (RES-E) are interesting options from the point of view of reducing portfolio risk, due to the absence of the cost of fossil fuels, characterised by high volatility. This is combined with the indigenous character and energy independence-security goal offered by RES-E, considering the uncertain context of the geo-strategy of each territory. A practical application of MPT to the German and Spanish mixes for 2030, 2040 and 2050 is also proposed in this chapter.

Suggested Citation

  • Fernando de Llano Paz & Javier Eduardo Afonso Arévalo & Guillermo Iglesias Gómez, 2023. "Analyzing the suitability and role of modern portfolio theory for renewable energy planning," Chapters, in: Pablo del Río & Mario Ragwitz (ed.), Handbook on the Economics of Renewable Energy, chapter 14, pages 308-339, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:20354_14
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    File URL: https://www.elgaronline.com/doi/10.4337/9781800379022.00023
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