Diversification of Energy Resources for Electricity Generation in Pakistan Via Portfolio Optimization

Uncertainty in the energy sector of Pakistan has contributed to the necessity of effective electricity planning that can minimize given market risks and discourage the use of stand-alone generating costs. To this end, this paper leverages the mean-variance portfolio theory to design an efficient electricity generation mix. The mean-variance portfolio theory is typically used in the field of finance to design optimal portfolios for financial investments. The portfolio optimization for the energy sector is driven by similar objectives, that is, the minimization of either the cost or risk of the energy resource portfolio subject to various budget constraints. The first fundamental conceptualization of cost, risk, and diversification is established in the context of distributed energy resources. The second part deals with the computation of optimal efficient frontier for energy portfolio based on extensive statistical analysis over half-decade data collected for eight different technologies, namely coal, high-speed diesel, fuel oil, gas, solar, wind, and hydro. Numerical results reveal that diversification of energy sources, which consists of a mixture of all technologies, yields a solution with minimum risk