Development of cogeneration in Germany: A mean-variance portfolio analysis of individual technology’s prospects in view of the new regulatory framework

The Integrated Energy and Climate Protection Program of the German government includes the political target of doubling the share of combined heat and power generation (CHP) in Germany from currently about 13% to 25% by 2020. In order to reach this goal, a new CHP law was enacted to improve the framework conditions for CHP generation. In this paper, we aim at identifying which CHP technologies are most likely to be installed in the near future to reach the CHP target stipulated by the German government. In our model, we apply Mean-Variance Portfolio (MVP) theory to consider return- and risk-related aspects of various CHP technologies. The analysis pays tribute to specific characteristics of CHP generation, such as promotion via guaranteed feed-in tariffs, additional revenues from heat sales, specific operational features, and specifics concerning the allocation of CO2 allowances. The investigation is based on four generic standard CHP technologies currently available on a commercial basis: large coal-fired CHP plants, combined-cycle gas turbines (CCGT-CHP), engine-CHP and micro-turbine CHP. As selection criteria for the portfolio performance we take, independently from each other, the net present value (NPV) of investment in CHP and the expected annual portfolio return, and compare the results obtained from both approaches. Irrespective of the chosen selection criteria, the analysis shows that CCGT-CHP and engine-CHP are the most attractive CHP technologies from a return perspective. A diversification of the portfolio with other kinds of CHP technologies can contribute to stabilizing portfolio returns. In view of the results obtained we conclude for the further development of CHP generation in Germany that a large portion of additional new CHP capacity will probably be built in the industrial sector.