CVaR portfolio models for electricity generating capacities
Jana Szolgayová
PhD thesis advisor: Pavol Brunovský
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Summary: The focus of the thesis is on the application of conditional Value-at-Risk to the optimal portfolio selection problem. In particular, portfolios of real assets are analyzed, the motivation being the investment into new electricity generating capacities under climate policy uncertainty. We present a combined real options and portfolio optimization framework. It enables to account both for the optimization on the plant level and at a larger scale. The formulated real option model is used to derive the optimal management strategy under stochastic emmissions and fuel prices on the power plant level for each of the electricity generating technologies considered. Following this strategy implies a distribution of profit flows representing the profitability of the technology in case it is operated optimally. These profit distributions are used as an input for the portfolio model. Three different portfolio models are formulated, accounting for the specifics of the underlying problem. For the profit distributions derived by the real options model, these models are shown to lead to linear programming problems. For real data, the results of the individual models are presented and compared. In addition, the difference between the standard Markowitz portfolio framework and portfolio optimization based on conditional Value-a-Risk is analyzed in case of normally distributed asset profits.
Related papers

[1] Fuss, S., J. Szolgayová, M. Obersteiner, M. Gusti (2008), Investment under Market and Climate Policy Uncertainty, Applied Energy 85: 708-721.

[2] Szolgayová, J., S. Fuss and M. Obersteiner (2008), Assessing the Effects of CO2 Price Caps on Electricity Investments - A Real Options Analysis, Energy Policy 36.

[3] Fuss, S., D. Johansson, J. Szolgayová, and M. Obersteiner (2009), Impact of Climate Policy Uncertainty on the Adoption of Electricity Generating Technologies, Energy Policy 37: 733- 743.

[4] Fuss, S., J. Szolgayová (2009), Fuel Price & Technological Uncertainty in a Real Options Model for Electricity Planning, Applied Energy 86.

[5] Fortin, I., S. Fuss, J. Hlousková, N. Khabarov,M. Obersteiner, and J. Szolgayová (2008), An Integrated CVaR and Real Options Approach to Investments in the Energy Sector, Journal of Energy Markets 1(2).

[6] Fuss, S., J. Szolgayová, N. Khabarov and M. Obersteiner (2009), The Effects of Climate Policy on the Energy Technology Mix: An Integrated CVaR and Real Options Approach, in: Golub A. \& Markandya A. (eds), Modeling Environment-Improving Technological Innovations under Uncertainty, Routledge, London, UK.

[7] Fuss, S., N. Khabarov, J. Szolgayová, and M. Obersteiner (2009), Valuing Climate Change Uncertainty Reductions for Robust Energy Portfolios, Conference Proceedings of the 33rd International Symposium on Remote Sensing of Environment, Stresa, May 2009.

[8] Szolgayová, J., S. Fuss, N. Khabarov and M. Obersteiner (2009), A dynamic CVaR-portfolio approach using real options: An application to energy investments, Conference Proceedings of the EEM 2009. 6th International Conference on the European Energy Market, 27-29 May 2009

[9]} Szolgayová, J., S. Fuss, N. Khabarov and M. Obersteiner (2010), A dynamic CVaR-portfolio approach using real options: An application to energy investments, European Transactions on Electrical Power, doi: 10.1002/etep.429.

[10] Fuss, S., N. Khabarov, J. Szolgayová, and M. Obersteiner (2010), Renewables & Climate Change Mitigation: Irreversible Energy Investment under Uncertainty & Portfolio Effects, Energy Policy, In Press, doi: 10.1016/j.enpol.2010.06.061.