Portfolio optimization of diversified energy transition investments with multiple risks

Abstract

Portfolio investments in diverse low-carbon power technologies constitute an effective strategy to mitigate the intermittency of renewables and contribute to the energy transition. However, multiple uncertain risk factors, ranging from internal technology costs to external policies and markets, introduce significant revenue risks. This work couples the real option with the portfolio optimization model to construct an investment decision framework that considers the value of original coal-fired facilities. It first evaluates the feasibility of low-carbon retrofits on existing coal-fired facilities and investments in renewable power under Carbon Emission Trading (CET) and Renewable Portfolio Standards (RPS). In addition, we generate an optimal diversified portfolio strategy concerning the investment revenue of each project. The results indicate that the inherent infrastructure with a shorter remaining lifetime is not a logical choice for low-carbon retrofits. Low-cost budgets and high-yield targets are critical elements that limit the proportion of renewable investments. Moreover, carbon price volatility is the most dominant market risk factor in various power project investments. Appropriately scaling up the proportion of renewables can counteract the sharp volatility in electricity and carbon prices. Contrary to the minimal effect of changing renewable quotas, tightening policy regulations on carbon caps may increase the proportion of renewables under higher revenue targets.