Portfolio optimization of renewable energy assets: Hydro, wind, and photovoltaic energy in the regulated market in Brazil

- An important tool of risk analysis and portfolio optimization for renewable energy in Brazil is presented.
- Innovative stochastic models are used to generate synthetic time series of random variables.
- The cash flow model changes the correlation between sources.
- The influence of the debt on the diversification process is presented and analysed.
- A sensitivity analysis considering the Mechanism for Reallocation of Energy is performed.

This study proposes a methodology for risk analysis and portfolio optimization of power generation assets with hydro, wind, and solar power, considering the Regulated Contracting Environment and the Mechanism for Reallocation of Energy in Brazil. Innovative stochastic models are used to generate synthetic time series for the random variables water inflow, wind speed, solar irradiance, temperature of the photovoltaic panel, and average generation capacity of the Mechanism for Reallocation of Energy. The simulation is implemented using the Monte Carlo method associated with a Cholesky decomposition. An economic approach is presented taking into account taxation and financing, as well as the Markowitz Portfolio theory. The results show that the initial correlation between the energy resources is altered by the cash flow model and mainly by the debt. In the diversification process, the complementarity between sources helps to reduce the economic risk. The increase in debt increases the correlation, decreases the return and risk and, consequently, affects the diversification process and economic results. The Mechanism for Reallocation of Energy significantly reduces the hydroelectric economic risk and increases the financial return, which directly benefits the formation of portfolios.