Risk-Based Optimization of Renewable Energy Investment Portfolios: A Multi-Stage Stochastic Approach to Address Uncertainty

Abstract

This work presents a multi-stage stochastic optimization model intended to improve investment decision-making for energy projects by incorporating uncertainty in contexts and changes in market pricing. In contrast to conventional deterministic models, which generally concentrate on a singular stage while neglecting the intricacies associated with policy and market uncertainties, our methodology incorporates Conditional Value at Risk as a pivotal risk metric. Across a span of five years, the model predicts how investments will be distributed among three types of electricity projects: Solar Farm, Wind Farm, and Hydro Plant. The stochastic model strategically allocates an investment of USD 16.5 million to achieve an expansion in the capacity of 925 megawatts and an expected portfolio return of USD 1,822,500. Notably, the model maintains a Conditional Value at Risk of USD 100,000 and an impressive Sharpe Ratio of 18.2250, demonstrating its ability to offer improved risk-adjusted returns. This study illustrates the effectiveness of stage stochastic optimization in enhancing diverse and robust renewable energy portfolios.

Keywords

• renewable energy
• portfolio optimization
• stochastic optimization
• risk management
• scenario analysis