ADAPT: a price-stabilizing compliance policy for renewable energy certificates: the case of SREC markets

Khazaei, Javad, Coulon, Michael and Powell, Warren B (2017) ADAPT: a price-stabilizing compliance policy for renewable energy certificates: the case of SREC markets. Operations Research. ISSN 0030-364X (Accepted)

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Abstract

Currently most Renewable Energy Certificate (REC) markets are defined based on targets which create an artificial step demand function resembling a cliff. This target policy produces volatile prices which can make investing in renewables a risky proposition. In this paper, we propose an alternative policy called Adjustable Dynamic Assignment of Penalties and Targets (ADAPT) which uses a sloped compliance penalty and a self-regulating requirement schedule, both designed to stabilize REC prices, helping to alleviate a common weakness of environmental markets. To capture market behavior, we model the market as a stochastic dynamic programming problem to understand how the market might balance the decision to use a REC now versus holding it for future periods (in the face of uncertain new supply). Then, we present and prove some of the properties of this market, and finally we show that this mechanism reduces the volatility of REC prices which should stabilize the market and encourage long-term investment in renewables.

Item Type: Article
Schools and Departments: School of Business, Management and Economics > Business and Management
Research Centres and Groups: Quantitative International Finance Network
Subjects: H Social Sciences > HD Industries. Land use. Labour > HD9000 Special industries and trades > HD9502 Energy industries. Energy policy. Fuel trade
H Social Sciences > HG Finance > HG0101 Theory. Method. Relation to other subjects > HG0106 Mathematical models
T Technology > T Technology (General) > T0055.4 Industrial engineering. Management engineering > T0057 Applied mathematics. Quantitative methods > T0057.6 Operations research. Systems analysis
Depositing User: Michael Coulon
Date Deposited: 27 Apr 2017 08:02
Last Modified: 27 Apr 2017 08:06
URI: http://sro.sussex.ac.uk/id/eprint/67525

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