Power Sector Investment Risk & Renewable Energy: A Japanese Case Study Using Portfolio Risk Optimization Method

In Energy Policy
Volume (Issue): 40
Peer-reviewed Article

The conventional pricing mechanism used for electricity systematically hides huge
investment risks which are embedded in the overall cost of production. Although consumers are often
unaware of these risks, they present a large financial burden on the economy. This study applies the
portfolio optimization concepts from the field of finance to demonstrate the scope of greater utilization
of renewable energies while reducing the embedded investment risk in the conventional electricity
sector and its related financial burden. This study demonstrates that RE investment can compensate
for the risks associated with the total input costs; such costs being external volatilities of fossil fuel
prices, capital costs, operating and maintenance costs and the carbon costs. By means of example, this
case study shows that Japan could in theory obtain up to 9% of its electricity supply from green
sources, as compared to the present 1.37%, based on the utilisation of a portfolio risk-analysis
evaluation. Explicit comparison of the monetary values of the investment risks of conventional and
renewable energy sources shows that renewable energies have high market competitiveness. The
study concludes with a recommendation that, as a business objective, investors would benefit by
focusing on electricity supply portfolio risk minimization instead of cost.