Toward a Model for the Swedish-Norwegian Electricity Certificate Market

Abstract

This paper explores the Swedish-Norwegian market for electricity certificates, which is a support scheme for investments in renewable electricity production. Producers investing in new renewable capacity receive certificates based on their actual production. Retailers of electricity are required to buy certificates for a proportion of their total sales. If a retailers obligation is not met, a penalty fee is imposed. The certificates are traded both bilaterally and as a financial instrument on the Nasdaq Commodity Exchange. The design and potential success of this multistate support mechanism will be of great interest to policy makers and green investors. The dynamic equilibrium model of Coulon, Khazaei, Powell (2014) is adapted to the Swedish market. It is found to replicate historical long-term trends and price levels well. Sensitivity analyses show that the key drivers of certificate prices are the penalty levels and the discount rate. Further it is shown that a higher rate of certificate price feedback on the investment rate dampens the price fluctuations around the trend line. The rate of feedback is uncertain, but is assessed to be larger than zero.