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| 1 |
ID:
181441
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| Summary/Abstract |
European Commission favours market-based support policies, such as markets for tradable green certificates, to promote renewable energy. Meanwhile, these instruments have received critique for exposing investors to large price risk as the level of support is determined by the market price of certificates. Using a two-step procedure, this study builds upon the work of Fagiani and Hakvoort (2014) by firstly examining how regulatory interventions in the Swedish-Norwegian certificate market affect price volatility, focusing particularly on the period after Norway joined in 2012. The results show that interventions in the market exacerbate price risk by resulting in regimes of increased volatility. They indicate that, contrary to policymakers expectation, prices did not stabilise after the market integration with Norway. Employing a real options approach, the study further proceeds to demonstrate that price risk increases the threshold for immediate development of Swedish wind power projects; a one standard deviation increase in certificate price volatility is estimated to reduce the probability of project development by 12%. These findings illustrate that regulatory uncertainty in terms of high price volatility disrupts the investment climate in certificate markets, ultimately affecting cost-effectiveness of such policy.
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| 2 |
ID:
127290
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| Publication |
2014.
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| Summary/Abstract |
Price volatility in green certificate markets reflects uncertainty over future prices, representing a major source of risk for renewable energy generators. Price risk is considered the principal deficiency of this market-based policy since it causes investors to require higher returns. Moreover, investors are exposed to regulatory risk; namely, the risk that a change in the regulation will materially impact the certificate price. Regulatory uncertainty is reflected in market volatility exacerbating certificate price risk. Using an econometric approach, we investigate the role of regulatory changes on price volatility in the Swedish certificate market. The results of our analysis indicate that regulatory changes strongly affect certificate markets, resulting in periods of higher volatility. Moreover, we analyze whether certificate price volatility has changed after creating a joint Swedish/Norwegian market. Results indicate that the ambivalence surrounding the creation of this bigger market led to a period of increased price volatility between 2010 and 2011. Overall, this article brings a better understanding of the role of regulatory uncertainty on certificate markets, and gives evidence for its negative impact in terms of increased price volatility.
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