Applying modern portfolio theory to investment projects in electric energy markets

This paper deals with risk analysis of investment projects (IPs) conceived as an expansion of electrical systems together with their related financial decisions, such as leverage, hedging, and anticipated selling of additional capacity. An important scenario to be considered nowadays by many Brazilian electric utilities is the construction of a new power plant for expanding an existing system, which is mainly comprised of hydroelectric plants. This raises a number of relevant questions as to the type and size of the unit added, the level of future contractual electric energy instead of selling it on the spot market, etc. Therefore, IPs combine technical and financial uncertainties. Here we propose to extend the modern portfolio theory (MPT) to this broader class of both technical and financial risks. Various questions related to the practical application of such an idea are discussed.