SusTec publishes an analysis on the development of risk and return for renewable power generation portfolios

Over the coming years, variable renewables such as wind and photovoltaics will become increasingly exposed to market risks due to the gradual reduction in policy support. Building diversified portfolios of variable renewables and complementary technologies such as storage (i.e. technological diversification), and in different regions (i.e. geographical diversification) seem to be promising options to mitigate these risks. The extant literature, however, does not provide a comprehensive comparison of these two diversification strategies.

Using actual production data from eight wind and photovoltaics plants across Germany from 2015 until 2017 and a storage unit for arbitrage operations, the authors build a quantitative model to evaluate the impact of these strategies on investors’ risk and return. DownloadIn the analysisvertical_align_bottom, the results of two scenarios are compared: the first with actual prices and the second which assumes prices reflecting higher shares of variable renewables in the power system. In doing so, the study provides the following important insights for investors: (1) technological diversification largely yields lower risk levels than geographical diversification, (2) maximizing the capacity factor of wind and photovoltaics is an effective way to mitigate risk, and (3) while technological diversification with another variable renewable technology is more effective under current conditions, storage gains importance for mitigating risk in times of high shares of variable renewables.