The Benefit of Regional Diversification of Cogeneration Investments in Europe: A Mean-Variance Portfolio Analysis

FCN Working Paper No. 5/2009

38 Pages Posted: 4 Jun 2010 Last revised: 1 Jul 2010

See all articles by Günther Westner

Günther Westner

RWTH Aachen University - E.ON Energy Research Center

Reinhard Madlener

RWTH Aachen University

Date Written: November 2009

Abstract

The EU Directive 2004/8/EC concerning the promotion of cogeneration established principles on how EU member states can support combined heat and power generation (CHP). Up to now the implementation of these principles into national law has not been uniform and led to the adoption of different promotion schemes for CHP across the EU member states. In this paper, we first give an overview on promotion schemes for CHP in various European countries. In a next step, we take two standard CHP technologies, combined-cycle gas turbines (CCGT-CHP) and engine-CHP, and apply exemplarily four selected support mechanisms used in the four largest European energy markets: feed-in-tariffs in Germany; energy efficiency certificates in Italy; benefits through tax reduction in the UK; and purchase obligations for power from CHP generation in France. For contracting companies it could be of interest to diversify their investment in new CHP facilities regionally over several countries in order to reduce country and regulatory risk. By applying mean-variance-portfolio theory, we derive characteristic return-risk profiles of the selected CHP technologies in different countries. The results show that the returns on CHP investments differ significantly depending on the country, the support scheme and the selected technology studied. While a regional diversification of investments in CCGT-CHP does not contribute to reduce portfolio risks, a diversification of investments in engine-CHP can decrease the risk exposure.

Keywords: Combined Heat and Power, CHP Promotion Scheme, Portfolio Optimization

JEL Classification: C15, D81, G11, Q48

Suggested Citation

Westner, Günther and Madlener, Reinhard, The Benefit of Regional Diversification of Cogeneration Investments in Europe: A Mean-Variance Portfolio Analysis (November 2009). FCN Working Paper No. 5/2009. Available at SSRN: https://ssrn.com/abstract=1620450 or http://dx.doi.org/10.2139/ssrn.1620450

Günther Westner

RWTH Aachen University - E.ON Energy Research Center ( email )

Arnulfstrasse 56
Munich, 80335
Germany

Reinhard Madlener (Contact Author)

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustraße 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

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