A Multiple Criteria Decision Analysis and Portfolio Optimization Approach to Evaluating Strategies for Long Term Energy Security

Lim Wei Zi

Abstract

As tensions continue to grow in the Middle East, nations all over the world have made the security of their energy supply their main priority. Numerous policies have been implemented to ensure continuous and stable supplies of energy. However, the effectiveness of these policies are difficult to ascertain as there lacks an accepted method for evaluating energy security. While many indicators for energy security have been developed by different parties, their formulation lacks comprehensiveness and transparency.

This thesis proposes an integrated framework to aid the national planning for long-term energy security. Through this framework the current national level of energy security is evaluated and subsequently detailed strategies are formed for improving long-term security of energy supply. The ratings approach to the Analytic Hierarchy Process (AHP) was used to develop an Energy Security Index (IES) to access and rank the level of energy security of nations. A basic AHP model is defined whereby energy security is measured based on four main criteria: availability, accessibility, affordability and acceptability. Pair-wise comparisons are performed between the different energy resources utilized by the country to obtain their Fuel Security Index. This index is then aggregated to form the Energy Security Index.

The second part of the framework outlines the formulation and selection of strategies to improve the current level of energy security. Analysis of the Energy Security Index is conducted to determine the weakness of the current energy policy. The strategies formulated are then evaluated and selected through a decomposition of the basic AHP model. The criteria of interest to the user is extracted from the base model and inserted into a new AHP model. Pair-wise comparisons of all strategies are then performed in both models to obtain two sets of weights. A trade-off analysis is conducted using these weights and dominated strategies are eliminated.

Finally, the detailed plans for implementation of the strategies are devised through the identification of the nation's optimal energy portfolio. A linear programming (LP) model is first defined to determine the optimal composition of the nation's energy portfolio. Certain insights are then drawn from the solution of this LP to provide policy-makers with a better understanding of how energy resources should be appropriated in the economy. Finally, an adaptation of Markowitz's Modern Portfolio Theory was applied to determine an efficiency frontier that can aid policy-makers in determining the trade-offs between the cost and level of energy security. As an example on the application of this framework, analysis was carried out on power industry in Singapore to determine its long term strategy. The proposed framework provides an integrated approach to energy security planning that allows policy-makers determine the best strategies that should be implemented to improve their nation's energy security. Besides that, the framework also allows for the explicit determination of the cost of energy security which is of great value to policy-makers as it helps them decide on the level of energy security that their nation can afford. The Energy Security Index, IES, developed can also be used separately to compare and rank the level of energy security of various nations. Compared to the other energy security indicators that have been developed, this index is both comprehensive and transparent in its formulation. By examining the macro picture of the energy situation, policy-makers are able to find the optimal solution to their current energy predicament instead of current approach of sub-optimizing by looking at the problem in parts.