Application of modern portfolio theory to the European electricity mix: an assessment of environmentally optimal scenarios

Abstract

The proposed study analyzes the efficiency of the European energy mix of electricity generation technologies from two perspectives: environmental and economic. The context is that of European energy dependence and a technology mix conditioned by the import of fossil fuels. The impact is centered, among other elements, on the leakage of national income and the emission of polluting gases. The aim is to determine the participation that each type of power plant in each country should present in order to minimize the total environmental impact. In order to solve this problem, a double optimization is proposed through the use of two methodologies: one based on a multi-criteria decision-making method (MCDM) model with which to evaluate the environmental performance of each power plant, and a second optimization based on a quadratic model of portfolios modern portfolio theory (MPT), with which to evaluate the efficiency of the portfolio of technologies from the cost/risk binomial. The results confirm that an environmentally efficient portfolio leads to higher levels of economic risk-taking, with a slight increase in the level of assumed cost. Nevertheless, from the results obtained, it is possible to say that hydro (with a share between 11 and 13%) and wind (37–44% mix participation) technologies resulted to be preferred options both environmentally and in terms of minimum risk efficiency. Nuclear power generation stands out as one of the main baseload technologies with shares between 25 and 35% in environmental and cost/risk efficiency. As main findings, Hydro, supercritical lignite, solar PV and wind are identified as preferential technologies to be present in both minimum risk and minimum cost efficient portfolios. In case European Union pursues for minimizing the cost of electricity production, the shares of supercritical lignite, nuclear, solar PV and wind energy go up to the maximum allowed limits. The novelty lies in the application of both methodologies with which to complement the analysis and design efficient portfolios of energy technologies from environmental and economic points of view. One possible future approach would be to assess (with the MPT model) new environmentally optimal portfolios obtained through the application of other MCDM techniques.