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Investing in Energy Conversion Technologies - An Optimum Vintage Portfolio Selection Approach

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  • Zon, Adriaan van
  • Fuss, Sabine

    (MERIT)

Abstract

The methods by which fuels can be converted into electricity all belong to different “technology families”: the “gas-fired-turbine-family”, the “coal-fired-turbine-family”, etc. Each family consists of different generations of similar technologies, as in a vintage model. Within a family, the latest generation embodies the most recent level and type of knowledge, becoming more and more outdated as new generations arrive. Producers face the problem how to compose their portfolio of families to minimize risk-adjusted costs of investment and production under a given demand constraint. Risk emanates from a number of uncertainties, such as volatile fuel prices and uncertain (prospects of) technological change. The paper presents a model capturing these features by integrating elements from financial Optimum Portfolio Theory (OPT) in a vintage capital investment framework. We find that the cumulative nature of embodied technical change gives rise to investment responses to (changes in) uncertainty that are in between the ‘standard’ results of OPT and Real Option Theory.

Suggested Citation

  • Zon, Adriaan van & Fuss, Sabine, 2005. "Investing in Energy Conversion Technologies - An Optimum Vintage Portfolio Selection Approach," Research Memorandum 023, Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT).
    • Handle: RePEc:unm:umamer:2005023
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    File URL: https://unu-merit.nl/publications/rmpdf/2005/rm2005-023.pdf
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    References listed on IDEAS

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    1. Joan Robinson, 1962. "Essays in the Theory of Economic Growth," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-00626-7.
    2. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    3. Gregory, R G & James, Denis W, 1973. "Do New Factories Embody Best Practice Technology?," Economic Journal, Royal Economic Society, vol. 83(332), pages 1133-1155, December.
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    Cited by:

    1. Lado-Sestayo, Rubén & De Llano-Paz, Fernando & Vivel-Búa, Milagros & Martínez-Salgueiro, Andrea, 2023. "Commodity exposure in the eurozone: How EU energy security is conditioned by the Euro," Energy, Elsevier, vol. 277(C).
    2. Huang, Yun-Hsun & Wu, Jung-Hua, 2008. "A portfolio risk analysis on electricity supply planning," Energy Policy, Elsevier, vol. 36(2), pages 627-641, February.
    3. Delarue, Erik & De Jonghe, Cedric & Belmans, Ronnie & D'haeseleer, William, 2011. "Applying portfolio theory to the electricity sector: Energy versus power," Energy Economics, Elsevier, vol. 33(1), pages 12-23, January.
    4. Wu, Jung-Hua & Huang, Yun-Hsun, 2014. "Electricity portfolio planning model incorporating renewable energy characteristics," Applied Energy, Elsevier, vol. 119(C), pages 278-287.

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