Technology Portfolios: Modelling Technological Uncertainty and Innovation Risks

Abstract

AUTHORS' SUMMARYThe case study reviews a range of methodologies and model-based applications that can assist policy decisions under irreducible technology innovation uncertainties. One approach uses scenario analysis. A scenario study that explored a range of salient future uncertainties identified energy efficiency and conservation as the single most important and also most robust technology option for climate mitigation. Another approach uses portfolio theory to quantify the benefits from diversified technology portfolios in the framework of risk-averse decision-making. Such studies suggest risk aversion leads to higher adoption rates of currently higher-cost energy technology options such as modern biomass, renewables, and also carbon capture and storage (CCS). Diversification not only reduces the mean of risk exposure but also drastically lowers the tails of extreme undesirable outcomes. Portfolio theory and scenario analysis can also be combined, as illustrated by a study of three different energy system objectives (energy security, air pollution, climate change) within a multi-criteria optimization framework. Scenarios in which objectives were met individually, and then all together, under a range of uncertainties again demonstrated the benefits of portfolio diversification with greater emphasis on energy efficiency and "general purpose" energy conversion technologies. These examples discussed in this case study show that formal tools and approaches, including scenario analysis, portfolio theory, and multi-criteria optimization, are increasingly available to move technology portfolio decisions onto a more rational ground.

Socioeconomic factors and future challenges of the goal of limiting the increase in global average temperature to 1.5 °C

“…This study has several limitations and further research potential. First, technological change could be driven by most fundamental socioeconomic drivers such as R&D investment in the energy-supply sector and energy efficiency improvement for energy enduse [47][48][49][50][51][52], and that may sometimes be cost effective. Here, in this study, the SupTech case is run by assuming that the reduction in investment cost indicates investment efficiency improvement as a result of the technological change.…”

Coping with uncertainties-examples of modeling approaches at IIASA

“…Here the concept of portfolios, long established in financial investments can be usefully applied to the climate change issue (see e.g. Grubler et al, 2014).…”