Technology portfolios: Modelling technological uncertainty and innovation risks

Authors’ Summary. The case study reviews a range of methodologies and model-based applications that can assist policy decisions under irreducible technology innovation uncertainties. One approach uses scenario analysis. A scenario study that explored a range of salient future uncertainties identified energy efficiency and conservation as the single most important and also most robust technology option for climate mitigation. Another approach uses portfolio theory to quantify the benefits from diversified technology portfolios in the framework of risk-averse decision making. Such studies suggest risk aversion leads to higher adoption rates of currently higher-cost energy technology options such as modern biomass, renewables, and carbon capture and storage. Diversification not only reduces the mean of risk exposure but also drastically lowers the tails of extreme undesirable outcomes. Portfolio theory and scenario analysis can also be combined, as illustrated by a study of three different energy system objectives (energy security, air pollution, climate change) within a multi-criteria optimisation framework. Scenarios in which objectives were met individually, and then all together, under a range of uncertainties again demonstrated the benefits of portfolio diversification with greater emphasis on energy efficiency and "general purpose" energy conversion technologies. The examples discussed in this case study show that formal tools and approaches, including scenario analysis, portfolio theory, and multi-criteria optimisation, are increasingly available to move technology portfolio decisions onto a more rational ground.