A load factor based mean–variance analysis for fuel diversification

Fuel diversification implies the selection of a mix of generation technologies for long-term electricity generation. The goal is to strike a good balance between reduced costs and reduced risk. The method of analysis that has been advocated and adopted for such studies is the mean–variance portfolio analysis pioneered by Markowitz (Markowitz, H., 1952. Portfolio selection. Journal of Finance 7(1) 77–91). However the standard mean–variance methodology, does not account for the ability of various fuels/technologies to adapt to varying loads. Such analysis often provides results that are easily dismissed by regulators and practitioners as unacceptable, since load cycles play critical roles in fuel selection. To account for such issues and still retain the convenience and elegance of the mean–variance approach, we propose a variant of the mean–variance analysis using the decomposition of the load into various types and utilizing the load factors of each load type. We also illustrate the approach using data for the state of Indiana and demonstrate the ability of the model in providing useful insights.