Pollutant versus non‑pollutant generation technologies: a CML‑analogous analysis

Abstract

[Abstract]: In this work, we apply the Modern Portfolio Theory and the Capital Assets Pricing Model financial tools to a portfolio of CO2-emitting generation technologies under diverse scenarios. We will calculate the efficient—in the sense of having the minimum risk for a given level of emissions—portfolios frontier. The Capital Market Line (CML) is the place where all the possible combinations of a specific efficient portfolio and a pollutionfree portfolio—made up with nuclear and renewable generation technologies—lie. In Finance, that specific efficient portfolio is called the market portfolio but we will see that in our case it lacks an evident meaning. Therefore, we will explain which should be the reference portfolio for power generation planning analysis. Anyway, the fact is that those combinations are less pollutant than the portfolios in the efficient frontier. Thus, a policymaker can analyse which is their effect on emissions reduction. We will start analysing the efficient pollutant generation portfolios. Then, we will introduce the CML-analogous lines (CML-A) to allow the possibility of reducing emissions by combining an efficient portfolio with a non-pollutant portfolio—this non-pollutant portfolio is free of both emissions and risk. Results support the necessity of considering the carbon capture and storage technol- ogy to achieve a less risky generation mix, with less emissions and allowing a higher diver- sification due to the presence of cleaner fossil fuel technologies. All of that leads to better levels of energy security.