The portfolio effect in the power sector of economies prioritizing renewable energy

Abstract

This paper applies modern portfolio theory to analyze the power sector portfolio effect in economies with a significant share of renewable energy. This study contributes to the literature by adopting a socio-economic perspective instead of relying solely on financial analysis, while also incorporating up-to-date data on renewable technology capabilities and costs. It explores the optimal combination of electricity-generating assets by considering both cost and risk using the levelized cost of electricity. The study compares current and future power generation mixes, showing that a high share of renewable energy can enhance energy security by reducing cost fluctuations. It suggests that addressing nuclear safety concerns could accelerate the adoption of less cost-competitive renewable technologies. The research emphasizes that efficient power generation mixes require consideration of both cost and risk, and recommends a carefully phased investment approach to renewable energy technologies for countries where renewables are less cost-competitive than fossil fuels.