Optimal investment portfolio strategy for carbon neutrality of power enterprises

The reduction of carbon emissions in the power sector is a key step towards achieving the carbon neutrality target. This study explores the optimal investment strategy for power generation enterprises of China to achieve carbon neutrality. A portfolio optimization model with carbon emission penalty function is proposed. The real option is integrated into the model to obtain the investment value under uncertainties. Four scenarios are used in an empirical study, including baseline scenario, renewables scenario, cleaning fossil fuels scenario, and non-coal comprehensive energy scenario. The results detail the proportion of generation technology, portfolio revenue, and risk value. The generation of renewables is expected to account for more than 42 % in all scenarios that include both renewable energy and fossil energy, with wind generation accounting for the largest proportion. The cleaning fossil fuels scenario has the maximum conditional value at risk when the carbon neutrality target is included. Although fossil energy power generation is riskier, it occupies at least 40 % in the portfolio to safeguard stability. The electricity price and its volatility are positively correlated with the investment value and the conditional value at risk. The impact of the carbon dioxide price and its volatility on power generation projects is not monotonous.

Automated summary

This study explores the optimal investment strategy for power generation enterprises in China to achieve carbon neutrality. The results reveal that renewable energy generation, particularly wind power, is expected to account for more than 42% of the portfolio in all scenarios. The scenario involving the use of clean fossil fuels carries the highest level of risk, but fossil energy generation still plays a significant role in ensuring stability. The study further highlights the positive correlation between electricity price volatility and investment value and risk. Interestingly, the impact of carbon dioxide price and volatility on power generation projects is not linear.