Trends in portfolio optimization in a new risk-driven market era : a review and application of models for planners, investors and managers.

Today's quickly changing world forces society to deal with uncertainties that produce high levels of environmental, social, and economic risks, thereby jeopardizing sustainable development. Portfolio optimisation is an effective tool for formally dealing with such uncertainties, because the social and private optimum is not found by analysing cost/returns and risks of individual assets, projects, actions or plans, but rather requires analysing them all together in the form of a portfolio. This work first presents a review of portfolio optimisation applications from the perspective of energy planners. Multiple research opportunities were found, especially in spatial modelling, transmission, and renewable generation. The portfolio literature available to date excessively simplifies the power system. Supply, demand, and transmission modelling in portfolio analysis are not consistent with planning models, and therefore produce conflicting results. Despite abundant literature that analyses renewable complementarity, actual portfolio optimisation models ignore this effect, which leads to suboptimum portfolios. Policymakers have the task of inducing private agents, through their regulatory designs, to make decisions that point toward social welfare maximization. Conversely, it is a task of private agents to protect themselves against the risks of the sector. This work presents a review of the main applications, voids and challenges of portfolio optimization for two key agents of the private sector: investors and managers. Two fundamental issues were found in the literature; the first and most important is excessive confidence in historical data and statistical analysis for predicting future price behavior for a changing future in detriment of more structural analysis. The second is the omission of renewable complementarities, which is a proven characteristic of dispersed renewable plants that may have important risk-mitigation effects, although it has largely been ignored in portfolio analysis due to insufficient data, modeling limitations, and computational complexity. The literature on the way spatial diversification affects the entire power system, its prices and specifically renewable market value is scarce. Trying to cover part of this void, an analysis is made using real data and a simplified dispatch model to show evidence of the effects of diversification on wind and solar market value in Chile. Results suggest that spatial diversification has a strong positive effect on the market value of renewable generators, especially in scenarios with active transmission and hydro-storage constraints. Indeed, wind market value vary up to US$10/MWh depending on the level of diversification and the spatial and temporal constraints of the system and, given current storage capacity of hydro reservoirs, the solar market value may increase by US$5/MWh if transmission capacity is enough. Even though these results must be observed with caution, because they depend on the assumptions made, they are an additional effect of renewable spatial diversification. Uncertainty of the availability of transmission capacity affects the profitability of generation investments. Given the risk of suffering cuts in injections, an investor has the option of delaying the investment decision, developing the project in stages or simply canceling it. Renewable generation projects, especially solar photovoltaic (PV) and wind projects are modular and therefore suitable for being developed by stages. These flexibilities are generally ignored in the economic evaluations of such projects. This article presents a new methodology to evaluate different options of delaying and developing a project by stages, when facing the uncertainty of the availability of transmission infrastructure. A model to identify investments strategies based on a portfolio of real options is presented. It is shown that the value of the option depends essentially on the probabilities that are assigned to the commissioning date of the transmission infrastructure, on how important that infrastructure is for the evacuation of the generation project and the capital cost of the investor. This work is expected to assist investors by revealing the efficient frontier of their investment options and developing investment strategies to use the advantages of flexibilities of renewable projects.