Improvements to Modern Portfolio Theory based models applied to electricity systems

TL;DR

This paper enhances Modern Portfolio Theory models for electricity systems by incorporating generation costs, demand, and firm output, demonstrating significant differences in optimal portfolios and emphasizing diversification's role in smoothing renewable energy output.

Contribution

It introduces specific improvements to MPT models for energy planning, addressing key aspects like costs and firm output, and evaluates their impact using Brazil as a case study.

Findings

Modified models produce different efficient frontiers from original MPT.

High output standard deviation portfolios struggle to provide firm energy at low costs.

Diversification significantly smooths renewable energy output.

Abstract

With the increase of variable renewable energy sources (VRES) share in electricity systems, manystudies were developed in order to determine their optimal technological and spatial mix. Modern PortfolioTheory (MPT) has been frequently applied in this context. However, some crucial aspects, important inenergy planning, are not addressed by these analyses. We, therefore, propose several improvements andevaluate how each change in formulation impacts results. More specifically, we address generation costs, system demand, and firm energy output, present a formal model and apply it to the case of Brazil. Wefound that, after including our proposed modifications, the resulting efficient frontier differs strongly fromthe one obtained in the original formulation. Portfolios with high output standard deviation are not ableto provide a firm output level at competitive costs. Furthermore, we show that diversification plays animportant role in smoothing output from VRES portfolios