CO2 Price Volatility Effects on Optimal Power System Portfolios

Abstract

This paper investigates the effects of CO 2 price volatility on optimal power system portfolios and on CO 2 emissions assessment. In a stochastic setting in which three sources of uncertainty are considered, namely fossil fuels (gas and coal) and CO 2 prices, we discuss a unifying scheme for quantifying the impact of integrated environmental and renewable energy policies on the power system. We will show that the effects produced by a given environmental policy scheme strongly depend on the configuration of the power system, i.e., on the composition of the generating sources in the power system portfolio. In the empirical analysis performed on U.S. technical and cost data, we found that a non-volatile carbon tax scheme can produce significant effects on the power system portfolio selection problem in the presence of a carbon-free dispatchable source, like nuclear power, but it may have a negligible impact if the (non-renewable) dispatchable part of the power system portfolio is fully composed by fossil fuel, gas and coal, sources. On the other side, generating CO 2 price volatility market-oriented mechanisms can produce relevant effects on both power system configurations. Although the empirical analysis is performed on U.S. data, the proposed methodology is general and can be used as a quantitative support by policy makers in their attempts to reconcile environmental and economic issues.

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“…The problem of portfolios regarding the forecasts of short-term electricity was analyzed in terms of ARIMA models with stochastic programming and revealed some interesting insights regarding the 24h ahead electricity market (Sanchez et al power system portfolios are used in order to give a direction for policymakers regarding the establishment of a tradeoff between economic and environmental issues (Mari 2018). Other authors emphasize that by using the GARCH methodology for a diversified portfolio allocation, it is needed a bidirectional volatility transmission mechanism (Perifanis & Dagoumas 2018).…”