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

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. Considering the case of the Swedish Norwegian electricity certificate market, the main findings include: (i) price expectations are not formed easily, and hence, investment decisions must be made under considerable uncertainty; (ii) 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; (iii) the prices are highly sensitive to changes in electricity consumption and generation; (iv) regulatory changes should be implemented carefully to avoid increased uncertainty and a consequent increase in price volatility; and (v) the current policy of having a price-based penalty does not soften the two-state nature of this market. So far, the market has shown ample ability to promote cost-efficient investment in renewable electricity production. (C) 2017 Elsevier Ltd. All rights reserved.