Portfolio optimization for industrial cluster defossilization in the Port of Rotterdam

Abstract

Defossilizing feedstocks of industrial clusters has increasingly attracted attention due to potential impacts on climate change mitigation targets. However, the transition from fossil-based feedstocks to alternative carbon sources (ACS) presents both environmental and economic challenges in terms of performance and feasibility. One issue is the large uncertainties regarding the techno-economic feasibility in terms of investment decisions, which has been barely studied in the literature at cluster level. This study considers market price fluctuations of raw materials, products and energy over time to evaluate the profit and risk associated with individual plants for decision-making purposes. By adopting Modern Portfolio Theory (MPT), a portfolio optimization problem is defined to provide a risk-return-based guidance framework for transitioning to alternative carbon feedstocks. The proposed optimization model obtains investment portfolios and corresponding production capacity distributions based on the optimal constituents among fossil-based and ACS-based plants. The Port of Rotterdam, the Netherlands, is considered as a case study to assess the defossilization of feedstocks at the cluster level. The results show that integrating ACS-based plants into the cluster requires substantial capital investment, and reduces the Return on Investment (RoI) relative to the associated risk, making full defossilization economically challenging to achieve. However, applying a price-allocation method for re-costing ACS-based (by-)products considering governmental financial supports, the transition to alternative carbon sources can become attractive to investors at specific production capacities, as identified through optimal risk–return portfolios.