Development of cogeneration in Germany: A mean-variance portfolio analysis of individual technology

The Integrated Energy and Climate Protection Program of the German government includes the political target of doubling the share of combined heat and power generation (CHP) in Germany from currently about 13% to 25% by 2020. In order to reach this goal, a new CHP law was enacted to improve the framework conditions for CHP generation. In this paper, we aim at identifying which CHP technologies are most likely to be installed in the near future to reach the CHP target stipulated by the German government. In our model, we apply Mean-Variance Portfolio (MVP) theory to consider return- and risk-related aspects of various CHP technologies. The analysis pays tribute to specific characteristics of CHP generation, such as promotion via guaranteed feed-in tariffs, additional revenues from heat sales, specific operational features, and specifics concerning the allocation of CO2 allowances. The investigation is based on four generic standard CHP technologies currently available on a commercial basis: large coal-fired CHP plants, combined-cycle gas turbines (CCGT-CHP), engine-CHP and micro-turbine CHP. As selection criteria for the portfolio performance we take, independently from each other, the net present value (NPV) of investment in CHP and the expected annual portfolio return, and compare the results obtained from both approaches. Irrespective of the chosen selection criteria, the analysis shows that CCGT-CHP and engine-CHP are the most attractive CHP technologies from a return perspective. A diversification of the portfolio with other kinds of CHP technologies can contribute to stabilizing portfolio returns. In view of the results obtained we conclude for the further development of CHP generation in Germany that a large portion of additional new CHP capacity will probably be built in the industrial sector.

[1]  Aviel Verbruggen,et al.  Economic evaluation of independent CHP projects , 1993 .

[2]  Reinhard Madlener,et al.  Optimal technology choice and investment timing: A stochastic model of industrial cogeneration vs. heat-only production , 2007 .

[3]  G. Anandalingam.  Government policy and industrial investment in cogeneration in the USA , 1985 .

[4]  Ian M. Dobbs.  Combined heat and power economics , 1982 .

[5]  Shimon Awerbuch,et al.  APPLYING PORTFOLIO THEORY TO EU ELECTRICITY PLANNING AND POLICY-MAKING , 2003 .

[6]  Mark Hinnells,et al.  Combined heat and power in industry and buildings , 2008 .

[7]  D. Bar-Lev,et al.  A Portfolio Approach to Fossil Fuel Procurement in the Electric Utility Industry , 1976 .

[8]  J. Mcdonald,et al.  Economics of Electricity Self-Generation by Industrial Firms , 1991 .

[9]  D. Newbery,et al.  Fuel mix diversification incentives in liberalized electricity markets: A Mean–Variance Portfolio theory approach , 2008 .

[10]  R. Madlener,et al.  Adoption and Diffusion of Decentralised Energy Conversion Technologies: The Success of Engine Co-Generation in Germany , 2003 .

[11]  Reinhard Madlener,et al.  Combined Heat and Power Generation in Liberalised Markets and a Carbon-Constrained World , 2003 .

[12]  Peter Zweifel,et al.  Efficient Electricity Portfolios for Switzerland and the United States , 2006 .

[13]  Mauro Reini,et al.  Optimal lay-out and operation of combined heat & power (CHP) distributed generation systems , 2009 .

[14]  Janusz Kotowicz,et al.  The influence of the legal and economical environment and the profile of activities on the optimal d , 2011 .

[15]  Christoph Weber,et al.  Optimal electricity generation portfolios , 2012, Comput. Manag. Sci..

[16]  Angel A. Bayod-Rújula,et al.  Future development of the electricity systems with distributed generation , 2009 .

[17]  Luca Giaccone,et al.  Economical comparison of CHP systems for industrial user with large steam demand , 2009 .

[18]  M. D. Schicktanz,et al.  Primary energy and economic analysis of combined heating, cooling and power systems , 2011 .

[19]  Paul L. Joskow,et al.  The Simple Economics of Industrial Cogeneration , 1983 .

[20]  Christof Wittwer,et al.  Decentralised optimisation of cogeneration in virtual power plants , 2010 .

[21]  Reinhard Madlener,et al.  Evaluation of Different Hedging Strategies for Commodity Price Risks of Industrial Cogeneration Plants , 2013 .

[22]  Won-Cheol Yun,et al.  Measuring economies of scope for cogeneration systems in Korea: a nonparametric approach , 2003 .

[23]  Atsushi Akisawa,et al.  Modelling the adoption of industrial cogeneration in Japan using manufacturing plant survey data , 2003 .

[24]  Reinhard Madlener,et al.  The Benefit of Regional Diversification of Cogeneration Investments in Europe: A Mean-Variance Portfolio Analysis , 2009 .

[25]  J. Lintner.  THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS , 1965 .

[26]  Shi-Jie Deng,et al.  Mean-risk efficient portfolio analysis of demand response and supply resources , 2009 .

[27]  Aviel Verbruggen,et al.  Combined heat and power: A real alternative when carefully implemented , 1992 .

[28]  Joachim Nitsch,et al.  Leitszenario 2009: Langfristszenarien und Strategien für den Ausbau erneuerbarer Energien in Deutschland , 2011 .

[29]  W. Sharpe.  CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK* , 1964 .