Applying Mean-Variance Portfolio Analysis to E.ON's Power Generation Portfolio in the UK and Sweden

Summary: Over the coming years, the European electricity industry will face enormous challenges concerning both new and existing power generation assets, also with respect to optimal (re-)investment decision-making. For the selection of suitable technologies and their integration into the existing generation mix, and apart from taking into account socio-technical aspects and the expected profitability of the plants, it is of crucial importance to also explicitly consider the financial risks and achievable risk diversification. In recent years, the energy company E.ON has been strongly engaged in the electricity markets in the United Kingdom and Sweden, respectively, and successively built up power generation capacities of various kinds. Hence it is interesting to study these investment decisions and the resulting portfolios by means of mean-variance portfolio analysis, a method that was originally developed for financial markets by Markowitz (1952), and recently has become increasingly popular in the energy economics literature.