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Optimal Behaviour in Solar Renewable Energy Certificate (SREC) Markets

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  • Arvind Shrivats
  • Sebastian Jaimungal

Abstract

SREC markets are a relatively novel market-based system to incentivize the production of energy from solar means. A regulator imposes a floor on the amount of energy each regulated firm must generate from solar power in a given period and provides them with certificates for each generated MWh. Firms offset these certificates against the floor and pay a penalty for any lacking certificates. Certificates are tradable assets, allowing firms to purchase/sell them freely. In this work, we formulate a stochastic control problem for generating and trading in SREC markets from a regulated firm's perspective. We account for generation and trading costs, the impact both have on SREC prices, provide a characterization of the optimal strategy, and develop a numerical algorithm to solve this control problem. Through numerical experiments, we explore how a firm who acts optimally behaves under various conditions. We find that an optimal firm's generation and trading behaviour can be separated into various regimes, based on the marginal benefit of obtaining an additional SREC, and validate our theoretical characterization of the optimal strategy. We also conduct parameter sensitivity experiments and conduct comparisons of the optimal strategy to other candidate strategies.

Suggested Citation

  • Arvind Shrivats & Sebastian Jaimungal, 2019. "Optimal Behaviour in Solar Renewable Energy Certificate (SREC) Markets," Papers 1904.06337, arXiv.org, revised Apr 2020.
  • Handle: RePEc:arx:papers:1904.06337
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    References listed on IDEAS

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    1. Ren� Carmona & Michael Coulon & Daniel Schwarz, 2012. "The valuation of clean spread options: linking electricity, emissions and fuels," Quantitative Finance, Taylor & Francis Journals, vol. 12(12), pages 1951-1965, December.
    2. Coulon, Michael & Khazaei, Javad & Powell, Warren B., 2015. "SMART-SREC: A stochastic model of the New Jersey solar renewable energy certificate market," Journal of Environmental Economics and Management, Elsevier, vol. 73(C), pages 13-31.
    3. Seifert, Jan & Uhrig-Homburg, Marliese & Wagner, Michael, 2008. "Dynamic behavior of CO2 spot prices," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 180-194, September.
    4. Hitzemann, Steffen & Uhrig-Homburg, Marliese, 2018. "Equilibrium Price Dynamics of Emission Permits," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(4), pages 1653-1678, August.
    5. repec:dau:papers:123456789/2267 is not listed on IDEAS
    6. Eirik Amundsen & Fridrik Baldursson & Jørgen Mortensen, 2006. "Price Volatility and Banking in Green Certificate Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 35(4), pages 259-287, December.
    7. Hustveit, Magne & Frogner, Jens Sveen & Fleten, Stein-Erik, 2017. "Tradable green certificates for renewable support: The role of expectations and uncertainty," Energy, Elsevier, vol. 141(C), pages 1717-1727.
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