Tradable green certificates for renewable support: The role of expectations and uncertainty

Abstract

This paper analyzes tradable green certificate markets, where producers investing in new renewable capacity receive certificates based on their production. These are sold to electricity retailers, who are required to buy certificates in an amount proportional to their total sales. To assess the performance of such a scheme, we develop a stochastic model based on dynamic programming. The goal is to use the structure and rules of this designed market, together with historical data so far, to model and analyze price dynamics, with a view to policy analysis and future market development. Considering the case of the Swedish–Norwegian electricity certificate market, the main findings include: (i) under the current market structure, prices are expected to start at today’s level, while decreasing steadily towards zero when approaching the planned end of the market; (ii) the prices are highly sensitive to changes in electricity consumption and generation; So far, the market has shown ample ability to promote cost-efficient investment in renewable electricity production.