The Role of Wind Generation in Enhancing Scotland’s Energy Diversity and Security: A Mean-Variance Portfolio Optimization of Scotland’s Generating Mix

Today's dynamic and uncertain energy environment requires portfolio-based techniques that reflect market risk and de-emphasize stand-alone generating costs. MVP theory is well tested and ideally suited to evaluating national electricity strategies. It helps to identify solutions that enhance energy diversity and security and are therefore more robust than arbitrarily mixing technology alternatives. Portfolio analysis reflects the cost interrelationship (covariances) among generating alternatives, which is crucial for correctly evaluating generating portfolios. The analysis does not represent or advocate for a particular capacity expansion plan. Rather, its purpose is to demonstrate that increasing the share of wind in Scotland generally lowers overall generating costs, even if it is believed that wind costs more than gas. Larger wind shares appear to insulate better the generating mix from systematic risk of gas (and coal) price movements, which have historically been quite correlated. Given the high degree of uncertainty about future energy prices, the relative value of generating technologies must be determined not by evaluating alternative resources, but by evaluating alternative resource portfolios. Energy analysts and policy makers face a future that is technologically, institutionally and politically complex and uncertain. In this environment, MVP techniques help to establish renewables targets and portfolio standards that make economic and policy sense. They also provide the analytical basis that policy makers need to devise efficient generating mixes that maximize security and sustainability.