Diversification of Energy Resources for Electricity Generation in Pakistan via Portfolio Optimization

Abstract

The aim of this paper is to investigate Pakistan’s efficient generation portfolios by comparing the portfolio costs, risks, efficient frontiers, and diversification levels under different cases and scenarios. Uncertainty in the energy sector of Pakistan has contributed to the necessity of effective electricity planning that can minimize given market risks and discourage the use of stand-alone generating costs. This paper presents a novel energy production optimization empirically using mean-variance portfolio theory. The proposed research work leverages the mean-variance portfolio theory to design an efficient electricity generation mix to diversify its energy mix by investing in renewable energy sources. The portfolio optimization for the energy sector is driven by the minimization of either the cost or risk of the energy resource portfolio subject to various budget constraints. In the context of decentralized energy sources, the current work presents an optimal portfolio design that takes into account average costs, risks, and diversity of the energy resources for electricity generation. This is followed by the computation of optimal efficient frontier for energy portfolio based on extensive statistical analysis over data collected for eight different technologies, namely coal, high-speed diesel, fuel oil, gas, solar, wind, and hydro. Numerical results reveal that diversification of energy sources, which consists of a mixture of all technologies, yields a solution that guarantees reliability of more than 90% for the given data.

Keywords

• Mean-variance portfolio
• energy resources planning
• diversification
• optimal efficient frontier