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Optimal Power Generation Portfolios with Renewables: An Application to the UK

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  • Adams, R.
  • Jamasb, J.

Abstract

In recent years, geopolitical events have raised questions about the security of European energy supplies and which electricity generation technologies present an optimal fuel mix. Likewise, private investors need to allocate their capital efficiently by devising portfolios of generation assets. This paper applies the Modern Portfolio Theory to determine an optimal portfolio with four electricity generation technologies. Using UK electricity and fuel price data and European carbon allowance prices for the period 2009-2013, we find that coal assets increase portfolio risk and decrease overall returns, whilst a combination of gas, nuclear and wind assets allows an investor to maximise risk-adjusted return. In addition, we examine the role of power purchase agreements (PPAs) to assess whether predictable revenues create more appealing portfolio characteristics. We find that such contracts reduce portfolio returns, highlighting the importance of the set prices and their possible fluctuations over time. The findings support electricity market reform that discourages coal investment and supports investment in renewable technologies. The results also suggest that PPAs could make sense for independent renewable generators, although this would require modelling of the uncertainty of variable load factors and operating costs.

Suggested Citation

  • Adams, R. & Jamasb, J., 2016. "Optimal Power Generation Portfolios with Renewables: An Application to the UK," Cambridge Working Papers in Economics 1646, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1646
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    Cited by:

    1. David Juárez-Luna, 2021. "Power generation portfolios: A parametric formulation of the efficient frontier," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(1), pages 1-29, Enero - M.
    2. David Juárez-Luna, 2021. "Power generation portfolios: A parametric formulation of the efficient frontier," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 16(1), pages 1-29, Enero - M.

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    More about this item

    Keywords

    Electricity; portfolio theory; technology; risk;
    All these keywords.

    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other

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