Analytical Methods for Energy Diversity and Security: Portfolio Optimization in the Energy Sector: A Tribute to the work of Dr. Shimon Awerbuch
364
Analytical Methods for Energy Diversity and Security: Portfolio Optimization in the Energy Sector: A Tribute to the work of Dr. Shimon Awerbuch
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Overview
Analytical Methods for Energy Diversity and Security is an ideal volume for professionals in academia, industry and government interested in the rapidly evolving area at the nexus between energy and climate change policy. The cutting-edge international contributions allow for a wide coverage of the topic.
Analytical Methods for Energy Diversity and Security focuses on the consideration of financial risk in the energy sector. It describes how tools borrowed from financial economic theory, in particular mean-variance portfolio theory, can provide insights on the costs and benefits of diversity, and thus inform investment decision making in conditions of uncertainty. It gives the reader an in-depth understanding of how to manage risk at a time when the world’s focus is on this area. The book provides insights from leading authorities in the area of energy security. It gives readers abundant, rigorous analysis and guidance at a critical time in facing the twin challenges of energy security and climate change. The book also highlights the role of clean energy technology in moving towards future diverse and intelligent electricity systems. It will be a trusted, first point of reference for decision-makers in the field of energy policy.
The book includes a foreword by the 2007 Nobel Peace Prize winner. All royalties from sale of this book will be donated to charities working in the energy sector in the developing world.
- Theoretical underpinning and applied use of Portfolio theory in the energy sector
- In-depth consideration of risk
- Contributions from leading international energy economists
- Innovative methodologies for thinking about energy security and diversity
Product Details
| ISBN-13: | 9780080915319 |
|---|---|
| Publisher: | Elsevier Science |
| Publication date: | 03/02/2009 |
| Series: | ISSN , #12 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 364 |
| File size: | 5 MB |
Read an Excerpt
Analytical Methods for Energy Diversity and Security
Portfolio Optimization in the Energy Sector: A Tribute to the work of Dr Shimon AwerbuchElsevier Science
Copyright © 2008 Elsevier Ltd.All right reserved.
ISBN: 978-0-08-091531-9
Chapter One
Diversity and Sustainable Energy TransitionsMulticriteria Diversity Analysis of Electricity Portfolios
Andy Stirling
Acknowledgements
First and foremost, for reasons discussed in the chapter, I would like to acknowledge Shimon Awerbuch for the many stimulating conversations on issues addressed here. I am also very grateful to comments from colleagues in the Sussex Energy Group, especially Raphael Sauter. The work reported is funded by the ESRC.
1.1 Diversity, security, sustainability and wider energy policy
As I know from happy memories of invigorating discussions, two great passions in Shimon Awerbuch's work lay in pushing for greater attention to be paid to diversity and sustainability in energy policy (Awerbuch, 1976, 2000a; Awerbuch and Yang, 2007). In a way that I hope Shimon would have appreciated, this chapter seeks to address both themes. Here, my approach, which often amused us in our dealings together, contrasts quite markedly with Shimon's own favored methods. Yet, in attempting an interdisciplinary effort of this kind, much would have been gained from Shimon's distinguishing qualities. His lively questioning of received assumptions, his openness to new ideas and his enthusiasm for positive change would all have made for a better chapter – and are sorely missed.
In this sadly felt absence, the discussion will be more prosaic. The present chapter will begin by reviewing some underexamined dimensions of the links between diversity and sustainability in energy policy. This will involve a brief survey of the remarkable variety of broad strategic reasons for an interest in energy diversity. Against this background, discussion will then turn to the definition of energy diversity itself, concentrating on three quite concrete properties and their treatment in various analytical approaches. It is on this basis that the chapter will then propose a new conceptual framework for addressing these attributes, in a way that remains flexible to different interpretations and priorities, but which allows for more systematic and transparent analysis of alternative strategies for securing energy diversity. Finally, a novel quantitative heuristic tool will be presented, with which to explore the tradeoffs between portfolio diversity and other aspects of economic and wider strategic performance, including system-level properties. It will be concluded that this new approach may offer a potentially fruitful framework for analysis under conditions (which fascinated Shimon), where conventional portfolio analysis is not applicable.
The starting point for this discussion, then, lies in the fundamental nature of the links between diversity and sustainability. Despite the high profiles of energy policy debates over diversification and transitions to sustainability, it is curious that, as general concepts, these remain ostensibly quite separate (DTI, 2006; CEC, 2007). In particular, there is a dearth of attention to their inherent (rather than circumstantial) interrelationships (Helm, 2007; IEA, 2007). Historically, discussion of energy diversity has been preoccupied with supply security, driven by successive 'oil shocks' and geopolitical concerns over the distribution and transit of fossil fuels (IEA, 1985; CEC, 1990; Verrastro and Ladislaw, 2007). Debates on sustainable energy, in contrast, have tended to focus on environmental imperatives and, especially latterly, abatement of carbon emissions (DTI, 2006). With important exceptions in the more detailed literature (Awerbuch and Yang, 2007; Helm, 2007; IEA, 2007), these two themes for the most part coexist in parallel as distinct 'pillars' in mainstream energy policy discourses (CEC, 2007).
Of course, it is important to acknowledge at the outset that there exist many more security-of-supply strategies than diversification alone. Although diversity is sometimes treated as the dominant means to energy security (PIU, 2001; DTI, 2006), a wide range of different measures is discussed in the literature. For instance, the ubiquitous aspiration to increase reliance on indigenous resources may sometimes be advocated as an energy security strategy, even if this reduces diversity (IEA, 1980). Likewise, states seek to deter threats of disruption by fostering economic interdependence on the part of supplier interests (European Energy Charter Secretariat, 2004). Intergovernmental bodies are established [such as the International Energy Agency (IEA) of the Organization for Economic Co-operation and Development (OECD)] to provide for more effective international planning of responses to disruption (Adelman, 1995). Expensive stockpiles are maintained for key resources, such as European and US strategic reserves (respectively) of refined and crude oil (Greene et al., 1998). Efforts are made to exercise greater control over energy supply chains, as by the UK Conservative government's action against the British miners in the 1980s (Lawson, 1992). Investments are made in redundant infrastructure, such as 'mothballed capacity' and 'spinning reserve' in electricity transmission and network reinforcement in distribution systems (Farrell et al., 2004). A premium is often paid for more flexible options, like dual fuel firing capability in electricity generation (Costello, 2004). Demand-side efficiency programs are supported in part to reduce the economic impacts of supply disruptions (Lovins and Lovins, 1982). Key infrastructures, such as that for long-range transport of natural gas, are increasingly audited for properties of 'resilience' in the face of particular or unspecified threats (JESS, 2004). Offensive military action remains a major energy security strategy option in many influential circles (Plummer 1983), although acknowledged with reticence. Finally, at the most general of levels, the effective functioning of energy markets themselves is often presented as the principal means toward optimizing energy security (Helm, 2007).
In all these ways, security of supply is clearly about more than diversity. Yet what is less well recognized is that diversity is equally more than just a security of supply strategy (Stirling, 1994). It is here that we encounter the sustainability agenda as a major parallel area for fundamental interests in energy diversity (Grubb et al., 2006; Bird, 2007). Before reviewing the linkages, however, it should be noted that some of the most prominent apparent connections actually tend on closer inspection to be quite contingent. For instance, one obvious resonance lies in considering resource depletion. This hinges on the seminal formulation of the Brundtland Commission, in which sustainability is about 'development that meets the needs of the present without compromising the ability of future generations to meet their own needs' (Brundtland, 1987). Although energy security concerns are often more proximate and political, all are conditioned by the fact that fossil fuels are scarce and depleting. Assuming their continued value, persistent unsustainable use of these finite resources can therefore be seen both as a consequence and as a driver of marginalization of interests of future generations. To diversify away from present dependences on scarce, diminishing fossil fuel supplies thus addresses both security and sustainability agendas.
The key point here is that this link between sustainability and diversity, although important, is more an artifact of history (and geology) than a fundamental interrelationship. On close inspection, the object of interest is not the property of diversity itself, but a contingent feature of the particular resources on which we presently happen to be overwhelmingly dependent. Were our incumbent energy technologies to be indefinitely sustainable into the future through harnessing of renewable (or, as sometimes claimed, nuclear) resources, then the depletion argument for diversification would not apply. A similar picture arises where (as is increasingly the case) sustainability concerns are restricted to the relatively circumscribed challenge of 'emissions reduction', and even further to the single indicator of carbon intensity. This reduced scope again prompts attention to diversification only incidentally, as a reflection of the currently marginal status of low-carbon options in the energy mix (DTI, 2006). Under scenarios where such options are dominant (again, as in systems based on renewables or nuclear), then diversity and 'emission reduction' agendas appear quite distinct. The conjunctions of diversity and sustainability in emission reduction agendas thus hinge more on contingent correlations of attributes among specific options rather than on any intrinsic interrelationships between the qualities of diversity and sustainability themselves.
Without diminishing the enormous political and economic significance of these circumstantial correlations between properties of particular energy options, it is important that they not be allowed to obscure appreciation of the deeper underlying linkages between diversity and sustainability. These more fundamental connections persist irrespective of any specific features of particular options. At root, the real interlinkages stem from the crucial (and often neglected) fact that diversity is an intrinsic and irreducible property of an energy system taken as a whole, rather than an attribute of any individual option in that system (Stirling, 1994). As a consequence, it is meaningless to speak of any single option offering 'diversity', without being explicit about the energy mix and other potential substitute option contributions by reference to which this diversity is appraised. Associating diversity with certain currently marginal options rather than others, begs crucial questions over the relative scale or efficiency of diversity benefits offered by other less privileged options (MacKerron and Scrase 2008). This has long been the norm in UK energy policy, for instance, where nuclear power has tended to be treated as a proxy for diversity, in ways that a former Secretary of State for Energy later acknowledged as an expedient 'code' (Lawson, 1992). The question has always been: how does nuclear compare with other means to secure equivalent diversity benefits (Stirling, 1994)? Whatever the specifics, a shorthand that conflates the general property of diversity with more partisan technology strategies is little more than rhetorical special pleading.
(Continues...)
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Table of Contents
PrefaceForeword 1, R. Pachauri, TERI
Foreword 2, Eddie O’Connor, Airtricity
Reader's Guide, The Editors
Introduction: Analytic Approaches to Quantify and Value Fuel Mix Diversity, The Editors
Part I: Assessing Risks, Costs and Fuel Mix Diversity for Electric Utilities
1. Diversity and Sustainable Energy Transitions: Multicriteria Diversity Analysis of Electricity Portfolios, by Andy Stirling
2. The Value of Renewable Energy as a Hedge Against Fuel Price Risk: Analytic Contributions from Economic and Finance Theory, by Mark Bolinger and Ryan Wiser
3. Using Portfolio Theory to Value Power Generation Investments, by The Editors
4. Use of Real Options as a Policy-Analysis Tool, by William Blyth
Part II: Applying Portfolio Theory to Identify Optimal Power Generation Portfolios
5. Efficient Electricity Generating Portfolios for Europe: Maximizing Energy Security and Climate Change Mitigation, by Shimon Awerbuch and Spencer Yang
6. Portfolio Analysis of the Future Dutch Generating Mix, by Jaap C. Jansen and Luuk Beurskens
7. The Role of Wind Generation in Enhancing Scotland’s Energy Diversity and Security:
A Mean-Variance Portfolio Optimization of Scotland’s Generating Mix, by Shimon Awerbuch, In Collaboration with Jaap C. Jansen and Luuk Beurskens
8. Generation Portfolio Analysis for a Carbon Constrained and Uncertain Future, by Ronan Doherty, Hugh Outhred and Mark O’Malley
9. The Economics of Renewable Resource Credits, by Christiaan Hogendorn and Paul Kleindorfer
Part III: Frontier Applications of the Mean-Variance Optimization Model for Electric Utilities Planning
10. Efficient and Secure Power for the United States and Switzerland, by Boris Krey and Peter Zweifel
11. Portfolio Optimiztion and Utilities’ Investments in Liberalized Power Markets, by Fabien A. Roques, David M. Newbery, William J. Nuttall
12. Risk Management in a Competitive Electricity Market, by Min Liu and Felix F. Wu
13. Application of Mean-variance Analysis to Locational Value of Generation Assets, by Serhiy Kotsan and Stratford Douglas
14. Risk, Embodied Technical Change and Irreversible Investment Decisions in UK Electricity Production: An Optimum Technology Portfolio Approach, by Adriaan van Zon and Sabine Fuss
Index
Shimon Awerbuch Biography
Charity
About the Editors
What People are Saying About This
Presents the elements of portfolio theory and practice and provides a set of case analyses that focus on various electricity planning and policy issues.