An Analysis of the Swedish-Norwegian Electricity Certificate Market
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This thesis explores tradable green certificate markets, a support scheme for investments in renewable electricity production. A case-study on the Swedish-Norwegian Electricity Certificate market is conducted. In this market producers investing in new renewable capacity receive certificates based on their actual production. These are sold to retailers of electricity, which are required to buy certificates for a proportion of their total sales. The design and potential success of this multistate support mechanism is of great interest to policy makers and green investors. A stochastic model based on dynamic programming is implemented to assess the performance of this market. A discussion on market dynamics, uncertainty and expectations forms the basis for the model choices. The main findings from the model include i) Price expectations are not formed easily, and hence, investment decisions have to be made under a lot of uncertainty, ii) Under the current market structure, prices are expected to start at today's level, while decreasing steadily towards zero in 2035 when the market is planned to end, iii) The prices are highly sensitive to changes in electricity consumption and generation of electricity, iv) Regulatory changes should be implemented carefully to avoid increased uncertainty and a consequent increase in price volatility and v) The price-based penalty further increases the volatility of the market. So far, the market has shown its ability to promote investments in renewable electricity production, however improvements of the market seem beneficial.