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Efficient Provision of Electricity for the United States and Switzerland


Krey, Boris; Widmer, Philippe K; Zweifel, Peter (2011). Efficient Provision of Electricity for the United States and Switzerland. Working paper series / Socioeconomic Institute No. 0812, University of Zurich.

Abstract

This study applies financial portfolio theory to determine efficient frontiers in the provision of electricity for the United States and Switzerland. Expected returns are defined by the rate of productivity increase of power generation (adjusted for external costs), volatility, by its standard deviation. Since unobserved productivity shocks are found to be correlated, Seemingly Unrelated Regression Estimation (SURE) is used to filter out the systematic component of the covariance matrix of the productivity changes. Results suggest that as of 2003, the feasible maximum expected return (MER) electricity portfolio for the United States contains more Coal, Nuclear, and Wind than actual but markedly less Gas and Oil. The minimum variance (MV) portfolio contains markedly more Oil, again more Coal, Nuclear, and Wind but almost no Gas. Regardless of the choice between MER and MV, U.S. utilities are found to lie substantially inside the efficient frontier. This is even more true of their Swiss counterparts, likely due to continuing regulation of electricity markets.

This study applies financial portfolio theory to determine efficient frontiers in the provision of electricity for the United States and Switzerland. Expected returns are defined by the rate of productivity increase of power generation (adjusted for external costs), volatility, by its standard deviation. Since unobserved productivity shocks are found to be correlated, Seemingly Unrelated Regression Estimation (SURE) is used to filter out the systematic component of the covariance matrix of the productivity changes. Results suggest that as of 2003, the feasible maximum expected return (MER) electricity portfolio for the United States contains more Coal, Nuclear, and Wind than actual but markedly less Gas and Oil. The minimum variance (MV) portfolio contains markedly more Oil, again more Coal, Nuclear, and Wind but almost no Gas. Regardless of the choice between MER and MV, U.S. utilities are found to lie substantially inside the efficient frontier. This is even more true of their Swiss counterparts, likely due to continuing regulation of electricity markets.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Socioeconomic Institute (former)
Dewey Decimal Classification:330 Economics
JEL Classification:C32, G11, Q49
Uncontrolled Keywords:Efficiency frontier, energy, electricity, portfolio theory, Seemingly Unrelated Regression Estimation (SURE)
Language:English
Date:December 2011
Deposited On:04 Jan 2012 16:13
Last Modified:05 Apr 2016 15:20
Series Name:Working paper series / Socioeconomic Institute
Number of Pages:40
Additional Information:Revised version
Official URL:http://www.soi.uzh.ch/research/wp/2008/wp0812.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php
Permanent URL: http://doi.org/10.5167/uzh-54336

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