Optimal Management of Green Certificates in the Swedish–Norwegian Market

39 Pages Posted: 15 Jun 2017

See all articles by Fred Espen Benth

Fred Espen Benth

University of Oslo

Marcus Eriksson

University of Oslo

Sjur Westgaard

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

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Date Written: June 14, 2017

Abstract

We propose and investigate a valuation model for the income of selling tradeable green certificates (TGCs) in the Swedish–Norwegian market, formulated as a singular stochastic control problem. Our model takes into account the production rate of renewable energy from a “typical” plant, the price of TGCs and the cumulative amount of certificates sold. We assume that the production rate has a dynamics given by an exponential Ornstein–Uhlenbeck process, and the logarithmic TGC price has a dynamics given by a Lévy process. For this class of dynamics, we find optimal decision rules for the state variables and a closed-form solution to the control problem. A case study of ICAP prices and wind production data from Denmark backs up our model choice and shows the relevance of this pricing approach.

Keywords: green certificates, optimal decision rule, empirical analysis, normal inverse Gaussian (NIG) distribution, singular stochastic control, dynamic programming

Suggested Citation

Benth, Fred Espen and Eriksson, Marcus and Westgaard, Sjur, Optimal Management of Green Certificates in the Swedish–Norwegian Market (June 14, 2017). Journal of Energy Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2986067

Fred Espen Benth (Contact Author)

University of Oslo ( email )

Center of Mathematics for Applications
Oslo, N-0317
Norway

Marcus Eriksson

University of Oslo ( email )

PO Box 6706 St Olavs plass
Oslo, N-0317
Norway

Sjur Westgaard

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

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