Energy policy and security through the lenses of stochastic portfolio theory and the ACEGES model

Abstract

Purpose: The chapter presents a new approach to address energy policy and security based upon the ACEGES (Agent-based Computational Economics of the Global Energy System) model and the SPT (stochastic portfolio theory). Design/Methodology/Approach: The ACEGES model is an agent-based model for exploratory energy policy by means of controlled computational experiments. The ACEGES model is designed to be the foundation for large custom-purpose simulations of the global energy system by modeling explicitly 216 countries. Findings: By using the ACEGES model, we can better explore the energy markets at the country level and provide assessments on export capacity (for energy producers) and import needs (for energy consumers) within a single umbrella. Based upon these country-specific assessments, the SPT framework provides a flexible framework for analyzing the energy market structure from a theoretical and practical perspective. As a theoretical methodology, the SPT framework provides insight into questions of market behavior and arbitrage and can be used to construct hedging energy portfolios with controlled behaviors. As a practical tool, the SPT framework can be applied to the analysis and optimization of energy portfolios for physical trade for energy export-oriented and import-oriented countries. Practical Implications: The integration of the ACEGES model and the SPT framework provides a way of analyzing the dynamics of the energy markets (for energy policy) and constructing energy portfolios for physical trade that can affect bilateral and multilateral energy trade agreements. Originality/Value: The paper provides a conceptual and a practical framework to address issues of energy policy and security by integrating for the first time the ACEGES model and the SPT framework to develop import and export portfolios for physical trade between countries. © Springer-Verlag London 2013.