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Green certificate markets, the risk of over-investment, and the role of long-term contracts

  • Kildegaard, Arne
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    Several papers have recently analyzed the theory and implementation of renewable energy support schemes. The case for a renewable electricity standard (RES) in tandem with a tradeable green certificate (TGC) market has been largely based on efficiency considerations. Case study evidence is inconclusive, in part due to the short track record, but is not generally favorable. Here we reconsider the efficiency case, both static and dynamic, in light of special characteristics of renewable energy projects. We find that when exclusively high fixed-cost technologies comprise the eligible technology pool, the equilibrium form of contracting obviates the principal efficiency advantages claimed for certificate markets. When low fixed-cost technologies compete alongside high fixed-cost technologies in the certificate market, we show that it is likely that long-term contracts will disappear, and the technological choice will be inefficiently shifted away from the high fixed-cost technology. We consider evidence from three well-developed certificate schemes--in Britain, Sweden, and Texas--and find that it is broadly consistent with the theory here.

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    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 36 (2008)
    Issue (Month): 9 (September)
    Pages: 3413-3421

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    Handle: RePEc:eee:enepol:v:36:y:2008:i:9:p:3413-3421
    Contact details of provider: Web page: http://www.elsevier.com/locate/enpol

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    7. Agnolucci, Paolo, 2007. "The importance and the policy impacts of post-contractual opportunism and competition in the English and Welsh non-fossil fuel obligation," Energy Policy, Elsevier, vol. 35(1), pages 475-486, January.
    8. Eirik S. Amundsen & Fridrik M. Baldursson & Jørgen Birk Mortensen, 2005. "Price Volatility and Banking in Green Certificate Markets," Discussion Papers 05-08, University of Copenhagen. Department of Economics.
    9. Menanteau, Philippe & Finon, Dominique & Lamy, Marie-Laure, 2003. "Prices versus quantities: choosing policies for promoting the development of renewable energy," Energy Policy, Elsevier, vol. 31(8), pages 799-812, June.
    10. Morthorst, P. E., 2003. "A green certificate market combined with a liberalised power market," Energy Policy, Elsevier, vol. 31(13), pages 1393-1402, October.
    11. Fristrup, Peter, 2003. "Some challenges related to introducing tradable green certificates," Energy Policy, Elsevier, vol. 31(1), pages 15-19, January.
    12. Lipp, Judith, 2007. "Lessons for effective renewable electricity policy from Denmark, Germany and the United Kingdom," Energy Policy, Elsevier, vol. 35(11), pages 5481-5495, November.
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