How to find the correlation coefficient between two technologies when those are sub correlated?

manpreet Best Answer 2 years ago

Suppose I have two power generating technologies, Coal and Oil, of which the generating cost components(total generating cost = Capital cost+Fuel cost+Variable O&M cost+Fixed O&M cost) are correlated in the following manner:

                                         Oil
                      Fuel           Variable O&M             Fixed O&M
           Fuel       0.48              0                       0
Coal    Var O&M       0                 0.7                     0.1
      Fixed O&M       0                 0.1                     0.7

Suppose Technology A is COAL and Technology B is OIL. How do I find the correlation between the total costs of the two technologies, that is COAL and OIL (one correlation coefficient) when three categories of costs are already correlated as given above? I have the weights of cost components of each total m.tuteehub.com/tag/technology">technology cost and the standard deviation of each cost component of the two technologies as well.

manpreet 2 years ago

Let me update your table to reduce confusion by making different variable names unique:

                                         Oil
                     Fuel.O          VarO&M.O               FixedO&M.O
           Fuel.C     0.48              0                       0
Coal     VarO&M.C     0                 0.7                     0.1
       FixedO&M.C     0                 0.1                     0.7

You have given 9 entries of a correlation matrix, but there should be a further 6 subdiagonal elements, being the correlations within Coal and within Oil.

For further simplicity:

CfCf Fuel.C
CvCv VarO&M.C
CxCx FixedO&M.C
OfOf Fuel.O
OvOv VarO&M.O
OxOx FixedO&M.O

C=Cf+Cv+CxC=Cf+Cv+Cx

O=Of+Ov+OxO=Of+Ov+Ox