Valuing diversity in energy supply

There is renewed interest in the role of supply diversity in promoting energy security. This paper explores ways of valuing diversity. A possible incentive mechanism for promoting diversity which takes account of underlying “disparities” between different technology options is developed. The mechanism provides a way of trading off cost and diversity and results in an “efficient” cost-diversity frontier by analogy with financial portfolio theory. If all technologies are believed to be equally disparate, the appropriate mechanism is a “levy” imposed on market share. If the technologies are not equally disparate, the levy needs to be adjusted by technology-specific multipliers that take account of levels of disparity and patterns of market share. The analysis is applied to two stylised situations. In the long-run equilibrium case, the implications of both different patterns of disparity and different values attached to diversity are investigated. The paper also explores the implications of applying such a mechanism to the current Great Britain electricity system. The implications in terms of financial flows, for both the market as a whole and for individual operators, are investigated. Finally, the appropriateness of such a mechanism in the light of other policy goals, and possible future research directions, is discussed.