Application of the Portfolio Theory to the Power Sector in Mexico

Abstract

Energy planning has become a most relevant subject due to its economic implications and the social welfare commitment of ensuring access to affordable energy. Over the last decades, Mexicos energy planning priority was to achieve universal access to electricity, thus least-cost optimization criteria has been the tool used to assess the expansion of power capacity. As a result of this policy, the energy mix relies heavily on fossil fuels. Nevertheless, a new paradigm in energy planning is expected to emerge from important changes in Mexican energy regulation, institutions and market mechanisms. In this context the portfolio theory is applied to find energy planning alternatives based on the risk minimization of generation technologies. Historical data on the cost of generation was used to quantify the risk, which is based on fuel fluctuation prices and investment costs. Additionally, the notion of realized generation capacity was used to find the most efficient mix of generation technologies in terms of risk, then, the best technological options to enhance energy security were identified. The results show that geothermal and hydropower plants are key technologies for decreasing risk due to fuel price volatility. Wind power is risky in terms of realized capacity. Nuclear and coal power plants are stable in capacity and operation costs. Thermal and gas technologies are the most vulnerable to fuel price variability. Finally, the key findings and implications for decision making when selecting generation technologies are presented.