Portfolio optimization in zonal energy markets: Evidence from Italy

Abstract

International Journal of Energy and StatisticsVol. 03, No. 02, 1550006 (2015) No AccessPortfolio optimization in zonal energy markets: Evidence from ItalyEmmanuel Senyo FianuEmmanuel Senyo FianuLeuphana University Lüneburg, Scharnhorststr. 1 21335, Lüneburg, Germany Search for more papers by this author https://doi.org/10.1142/S2335680415500064Cited by:2 Next AboutSectionsPDF/EPUB ToolsAdd to favoritesDownload CitationsTrack CitationsRecommend to Library ShareShare onFacebookTwitterLinked InRedditEmail AbstractThis paper examines different types of optimization techniques and provides a spatial analysis of energy prices. The last decade has seen an increasing interest in deregulated energy markets. There are few papers, to the author's knowledge, that have considered portfolio optimization, however not in the Italian zonal energy market since deregulation. In deregulated energy markets with zonal pricing the market is partitioned into a number of zones, each of which is assigned a market price to which market participants react to at any given point in time. The paper investigates with emphasis on portfolio theory accounting for the initial capital requirement for the various zones in the Italian energy market and computes the optimal allocation weights needed in the various zones to mitigate the risk inherent in the market. The market risk subsequently affects the zonal prices since these prices combine to bring about the single national electricity price (prezzo unico d'acquisto, PUN). Implementing a modified version of the Mean–Variance portfolio theory, we draw policy implications based on the empirical evidence providing good risk management strategy for market participants.Keywords:Electricity spot pricesportfolio theoryportfolio optimizationzonal pricing References H. M. Markowitz, Journal of Finance 7(1), 77 (1952). Crossref, Google Scholar H. M. Markowitz , Portfolio Selection: Efficient Diversification of Investments ( John Wiley & Sons , New York , 1959 ) . Google ScholarW. Sharpe, The Journal of Finance 19(3), 425 (1964). Crossref, Google ScholarJ. Lintner, The Review of Economics and Statistics 47(1), 13 (1965). Crossref, Google ScholarD. Bar-Lev and S. Katz, The Journal of Finance 31(3), 933 (1976). Crossref, Google ScholarH. Humphreys and K. McClain, The Energy Journal 19(3), 107 (1998). Google Scholar Awerbuch, S. and Berger, M. (2003). Energy security and diversity in the EU: A mean-variance portfolio approach. IEA Research Paper . Google ScholarL. Marzano, A. Melo and R. Souza, An approach for portfolio optimization of energy contracts in the brazilian electric sector, In: 2003 IEEE Bologna Power Tech Conference Proceedings (2003) p. 3. Google ScholarZ. Yu, Energy Economics 25(3), 255 (2003). Crossref, Google ScholarZ. Yu, International Journal of Electrical Power & Energy Systems 29(8), 600 (2007). Crossref, Google ScholarF. Roques, D. Newbery and W. Nuttall, Energy Economics 30(4), 1831 (2008). Crossref, Google Scholar L. Grossi and F. Laurini , Advances in Data Analysis and Classification 1 ( 2011 ) . Google Scholar M. Bjørndal and K. Jørnsten , The Energy Journal 51 ( 2001 ) . Google Scholar Villumsen, J. (2011). Modelling zonal pricing design under uncertainty in electricity markets. Technical Report, DTU Management . Google Scholar Á. Lorca and J. Prina , Electric Power Systems Research 109 , 80 ( 2014 ) . Crossref, Google ScholarR. Rockafellar and S. Uryasev, Journal of Banking & Finance 26(7), 1443 (2002). Crossref, Google Scholar F. Boffa and V. Pingali , Unpublished Manuscript ( 2006 ) . Google ScholarE. Guerci and A. Sapio, Revue de l'OFCE 124(5), 415 (2012). Crossref, Google ScholarA. Gaivoronski and G. Pflug, Journal of Risk 7(2), 1 (2005). Crossref, Google Scholar S. T. Rachev , S. V. Stoyanov and F. J. Fabozzi , Advanced Stochastic Models, Risk Assessment, and Portfolio Optimization: The Ideal Risk, Uncertainty, and Performance Measures ( John Wiley & Sons , New York , 2008 ) . Google ScholarS. Korkmaz, D. Goksuluk and G. Zararsiz, The R Journal 6(2), 151 (2014). Crossref, Google Scholar Remember to check out the Most Cited Articles! Check out these titles in energy issues! FiguresReferencesRelatedDetailsCited By 2Modeling risk contagion in the Italian zonal electricity marketEmmanuel Senyo Fianu, Daniel Felix Ahelegbey and Luigi Grossi1 Apr 2022 | European Journal of Operational Research, Vol. 298, No. 2A Network Framework of Investigating Systemic Risk in Zonal Energy MarketsEmmanuel Senyo Fianu and Luigi Grossi1 Jan 2016 | SSRN Electronic Journal, Vol. 105 Recommended Vol. 03, No. 02 Metrics History Received 27 January 2015 Revised 28 February 2015 Accepted 3 March 2015 Published: 30 June 2015 KeywordsElectricity spot pricesportfolio theoryportfolio optimizationzonal pricingPDF download