What are the implementation challenges of advanced Efficient Frontier portfolio optimization?
Dr. Jabbour: A number of practical issues have limited the effective application of portfolio optimization to date in the energy industry. Implementing an Efficient Frontier portfolio optimization capability requires several challenging capabilities including: • Market simulation to simulate forward and spot prices and market values for interrelated markets and commodities over an extended time period. • Parameterization/calibration to estimate the simulation parameters needed by the stochastic simulation process. • Generation optimization to simulate the operations of a fleet of power plants under different market prices and various unit, plant, and portfolio operating limits and availability scenarios. • Credit risk management to evaluate the credit rating of counterparties and estimate the impacts of potential credit changes including counterparty, collateral, contract, and exposure risks. • Load analysis to estimate gas and electric loads for a set of customer classes in one or mul
