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