Green Certificates and Market Power on the Nordic Power Market

Transcription

1 Green Certfcates and Market Power on the Nordc Power Market By Erk S. Amundsen 1 and Lars Bergman 2 Abstract: Many countres have started to desgn and ntroduce systems of Tradable Green Certfcates (TGCs n order to foster and stmulate electrcty generaton from renewable energy sources. The purpose of ths study s to elucdate under whch crcumstances, how, and to what etent market power n the TGC market can be used to affect the entre electrcty market. There are bascally two reasons for beng concerned wth market power n TGC markets. One s that a small number of companes may have eclusve access to frst rate stes for wnd power generaton. The other s that wthdrawal of a small number of TGCs mples a multple reducton of electrcty consumpton, wth correspondng ncreases of end user prces. For the purpose of nvestgatng the prncples by whch market power may be eercsed n ths settng an analytcal model s desgned and analytcal results are derved. To nvestgate matters further a numercal model, based on the analytcal model, s constructed and appled on the emergng TGC and electrcty markets n Norway and Sweden. The analyss shows that companes possessng capacty for green electrcty generaton, ndeed, have the ablty to eercse market power by wthholdng TGCs. Ths s partcularly true for the case where Norway and Sweden have separate domestc markets for TGCs. However, the analyss reveals that an openng of TGC trade between the two countres to a large etent acheves the obectve of elmnatng the use of market power that would otherwse be establshed. JEL classfcatons: C7; Q28; Q42; Q48 Key words: Renewable energy, electrcty, green certfcates, market power Epert Report for the second SESSA conference, Addressng Market Power and Industry Restructurng for Consumer Benefts, Stockholm, Sweden, October 7-8, Supplementary fnancal support from Elforsk, Sweden and NEMIEC (The Nordc Energy Research Program s gratefully acknowledged 1 Department of Economcs, Unversty of Bergen, Fosswnckelgate 6, N-5007, Bergen, Norway. E- mal: erk.amundsen@econ.ub.no, Phone: , Fa: Stockholm School of Economcs, Bo 6501, SE Stockholm, Sweden. E-mal: Lars.Bergman@hhs.se

2 1. Introducton 3 In recent years many countres have started to desgn and ntroduce systems of Tradable Green Certfcates (TGCs n order to foster and stmulate electrcty generaton from renewable energy sources. Thus, a TGC market was ntroduced n England & Wales n 2002 (now the UK Renewables Oblgaton Certfcates Market. In Sweden a TGC market was establshed n 2003, and wll be etended to nclude Norway n Common to these systems s that they seek to replace systems of drect governmental subsdes to renewable energy by market mechansms 4. More precsely the am s to create a market where dfferent types of renewable electrcty can compete on equal terms, thus relevng governments and publc agences from beng drectly nvolved n power ndustry nvestment decsons. Lke any other market a TGC market conssts of sellers and buyers. Sellers are the generators of green electrcty (.e. generators usng renewable sources for electrcty generaton. The generators obtan an amount of TGCs correspondng to the amount of green electrcty they load nto the network. The sellers thus get revenues both from sellng the electrcty on the electrcty wholesale market, and from sellng the TGCs receved from the ssung body on the TGC market. Buyers of TGCs are consumers/retalng companes that are requred to acqure certfcates correspondng to a certan percentage of the total consumpton of electrcty ( the percentage requrement. In other words the demand for TGCs s drectly derved from the demand for electrcty. A market clearng prce of TGCs s determned by the nterplay of supply and demand. Although the practcal eperences are lmted varous aspects of the functonng of TGC markets have been analysed wthn the frame of both theoretcal and numercal models. Both the analytcal and the numercal models of TGC markets show that these markets have some specal features that make them dfferent from other markets. In partcular, ths s related to the effects of applyng the nherent polcy 3 The authors would lke to thank Rchard Green, partcpants n the Stockholm SESSA-NEMIEC, meetng (October 8-9, 2004 and colleagues, for valuable comments. The usual dsclamer apples. 4 One basc dfference between the UK system and the Nordc system s that the UK system allows recyclng of revenues from the buy-out payments that electrcty companes that do not obtan suffcent ROCs have to pay. These buy-out payments are recycled to supplers that have presented ROCs. Contrary to ths, there s no recyclng of the correspondng penalty payments n the Nordc system. 2

3 measures of the system.e. the percentage requrement, the TGC prce bounds as determned by the polcy makers as well as polces related to CO 2 emsson. Thus, as shown n Amundsen and Mortensen (2001 and Amundsen and Nese (2002 an ncrease of the percentage requrement does not necessarly lead to an ncrease of the generaton of green electrcty. The same authors also showed that harsher CO 2 constrants (ncreased CO 2 taes or reduced number of emsson permts wll necessarly lead to an ncrease of green electrcty generated. [Amundsen, Baldursson and Mortensen, 2004] analysed the volatlty of TGC prce stemmng from the annual varatons of wnd power. Several specfc features of mult-country TGC markets have been studed by Bye et al. (2002, Fnon and Menanteau (2003, Bergman and Radetk (2003, Nese (2003 and Unger and Ahlgren (2003, Butler and Neuhoff (2004. It seems to us that many of the problems dscussed n these studes were not well understood when TGC markets were desgned and ntroduced. Another ssue that also seems to have been overlooked s the rsk for and mpact of market power n the TGC market. The purpose of ths study s to elucdate under whch crcumstances, how, and to what etent market power n the TGC market can be used to affect the entre electrcty market. There are bascally two reasons for beng concerned wth market power n TGC markets. The frst s the fact that the ndustry average cost curve for green electrcty tends to be upward slopng. Ths s because the cost of wnd power, the man source of green electrcty, depends on the locaton of the power plants, and that the avalablty of frst rate stes that do not nvolve sable new transmsson and network nfrastructure, s lmted. The stuaton s smlar for envronmentally frendly hydro power, and, to some etent, for other types of green electrcty. Thus, gven the state of technology and an upper cost lmt, there s a mamum amount of green electrcty that can be produced wthn a country. Ths means that some generators, by gettng access to the sutable stes, wll become domnatng producers of green electrcty and thus may be able to eercse market power n the TGC market. 3

4 The second reason for beng concerned wth market power n a TGC market s that, as a result of the percentage requrement, the wthdrawal of a gven number of TGCs from the market forces a much larger reducton of electrcty consumpton. Thus relatvely modest eercse of market power n the TGC market may have a sgnfcant mpact on the prce of electrcty and the allocaton of resources n the power ndustry. Moreover, by havng access to a large share of the best stes for generaton of green electrcty a small power producer may be able to eercse market power n the electrcty market by eercsng market power n the TGC market. In order to elucdate the nterplay between the electrcty and TGC markets a smple analytcal model s presented. Then a numercal verson of the model, depctng the Nordc electrcty market and the Norwegan-Swedsh market for TGCs s used to quantfy the mpact of TGC market power under varous assumptons about the dstrbuton of the essental resources for green electrcty producton. 2. Model The followng model s desgned to capture a long-run stuaton for smultaneous functonng electrcty and TGC markets. The followng varables wll be appled p : End-use prce of electrcty (net of dstrbuton costs and ta s : TGC prce s : Upper TGC prce bound s : Lower TGC prce bound q : Wholesale prce of electrcty : Quantty of total electrcty y : Quantty of black electrcty : Quantty of green electrcty w : Number of TGCs sold v : Number of TGCs used α : Percentage requrement The nverse demand functon s assumed gven by 4

5 p p(, wth p' ( < 0 The cost functon for black electrcty for a gven producer, ( 1,,n s assumed gven by c c y, wth c '( y > 0 and ( c ''( y 0 The cost functon for green electrcty s assumed gven by h (, wth h '( > 0 and h ''( y 0 Both black and green electrcty are delvered to a common wholesale market, from where proft mamng retalng companes purchase electrcty for end-use delveres. In addton to the wholesale market there s also a market for TGCs. Perfect competton For the case of perfect competton n both markets, the proft mamng market partcpants are prce takers. We assume each sngle electrcty producer, ( 1,..., n seeks to mame Π ( y qy ( q s c ( y h ( The frst order condtons are (assumng nteror solutons Π y Π q c '( y 0 q s h '( 0 These condtons reflect that each producer of green electrcty sells all TGCs generated. As the producer obtans one TGC per unt of green electrcty generated, the margnal gan from generatng one unt of green electrcty s equal to the sum of the wholesale prce and the TGC prce. 5

6 For each unt of electrcty bought on the wholesale market and sold to end-users the retalng companes wll have to pay the wholesale prce plus a proporton α of the TGC prce n accordance wth the percentage requrement. In market equlbrum ths mples that the end user prce must be equal to the sum of the wholesale prce and the mentoned proporton of the TGC prce,.e. p q αs The consumpton of electrcty, and ts composton of green and black electrcty, n equlbrum, vary accordng to whether the prce of TGCs n equlbrum, s s wthn the specfed prce nterval,.e. s < s < s, or at ether the upper or lower prce bound. If the prce of TGCs s wthn the prce bounds, the percentage requrement s fulflled and total consumpton of electrcty s gven by consumpton, where (the "allowed" α denotes total TGCs sold for all producers (and total green electrcty generated. If the TGC prce s at the lower prce bound,.e. demand for TGCs s less than s s, the, and the ecess supply of TGCs s bought by the State. In ths case the percentage requrement s more than fulflled. If the TGC prce s at the upper prce bound,.e. s s the demand for TGCs eceeds the mamum possble supply. In ths case, the consumers are allowed to buy more electrcty f they (the retalng companes pay a fne of αs per unt of electrcty n addton to the wholesale prce. In ths case the percentage requrement s not fulflled. Denotng aggregate quanttes by (correspondng symbols wthout subscrpts and equlbrum values by, the equlbrum condtons for the electrcty market under perfect competton read as follow 5 1 p q αs 2 y α 5 In equaton 2, <, and > refer to the cases s s, s < s < s and s s 6

7 3 q c '( y, 4 q s h '(, As eplaned the demand for TGCs s a derved demand determned smply as a percentage of the electrcty demand. Denotng the demand for electrcty by ( p ( q αs the demand for TGCs s thus gven by α ( q αs. The supply s equal to the number of TGCs generated whch s dentcal to the amount of green electrcty generated. Hence n equlbrum of the TGC market (nteror soluton we have α ( q αs A more compact way of characterng the compettve soluton for the electrcty market may be obtaned by successve substtuton of the above condtons.e. 5 p( (1 α c '( y αh '(, Ths condton states that the end-user prce s equal to a lnear combnaton of the ndvdual producer s margnal cost of provdng black and green electrcty, wth the percentage requrement as the combnaton weght. The compettve soluton s llustrated n Fg. 1 for the case of an nteror value of the TGC prce and constant margnal generaton costs for each technology, dentcal for all producers. The constant margnal generaton cost of black and green electrcty are denoted c and h, respectvely; wth h > c. In partcular, Fg. 1 llustrates how the TGC-system functons so as to constran total electrcty consumpton, to rase the end-user prce and to drve a wedge between the end user prce and the wholesale prce of power. Thereby, the revenue pad by the consumers become equal to α s. Ths revenue s transferred to the producers of green electrcty that wll receve (recall α. s 7

8 SEK h P cαs c αs /α Fg.1. Illustraton of the electrcty market equlbrum assumng constant generaton costs for green electrcty, h and for black electrcty, c. 8

9 Cournot soluton and market power Assumng standard Cournot behavor we consder two cases n the followng. Frst we consder the case where there s Cournot behavor only on the electrcty market. Thereafter we consder Cournot behavor on both the electrcty and the TGC market. Market power on the electrcty market In ths case we assume that the producers take the TGC prce as gven and mame profts as a Cournot player on the electrcty market. Clearly, the mplcaton of ths s that the producers wll sell all TGCs generated. Hence, the obectve functon may be formulated as n the compettve case ( ( ( ( h y c s q qy y Π The frst order condtons now read 0 '( ( Π y c q p y 0 '( ( Π h s q p In dervng these condtons, observe that p s p q q y q ( α, as s consdered as gven by the agents s Equlbrum condtons are 6 s q p α 7 α y 8 y c q p, '( ( 9 h s q p, '( ( 9

10 A more compact way of characterng the compettve soluton may be obtaned by successve substtuton of the above condtons.e. p 10 p( (1 α c '( y αh '(, Ths condton states that the producer's margnal revenue s equal to a lnear combnaton of the ndvdual producer's margnal cost of provdng black and green electrcty, wth the percentage requrement as the combnaton weght. Market power on both the electrcty market and the TGC market In ths secton we consder an electrcty producer that behaves as a Cournot player n both markets. In the formulaton to follow, however, we assume that the electrcty producer does not game on the smultaneous functonng of the two markets 6. Rather we assume that the producer n determnng the generaton of green and black electrcty only consders the electrcty market and thus takes the TGC prce as gven. Lkewse, we assume that the producer n determnng the amount of TGCs to sell, only takes the TGC market nto account and thus takes the wholesale prce as gven. Ths formulaton may be consdered as a standard Cournot formulaton wth multple markets. It s however, necessary to take nto account that the producer s constraned by the amount of TGCs generated,.e. we must have w w The electrcty producer, thus, faces the followng optmaton problem Ma Π ( y,, w q( y sw c( y h(, s. t. w To solve ths problem, formulate the Lagrangan functon R ( y,, w q( y sw c( y h( λ ( w 6 For a dscusson of ths problem, see Amundsen and Nese (

11 The frst order condtons are R p( 11 q c '( y 0 y R p( 12 q λ h '( 0 R 1 p( 13 w s λ 0 w α In dervng condton 13 observe that p q ( s p α 1 (, as q, by assumpton, s consdered as gven by w w α the agents as they sell TGCs. A producer wth w <, must have λ 0. For ths case condton 13 says that the margnal revenue of sellng TGCs should be equal to ero. In ths case there s an ecess of TGCs and the TGC system does not nduce ths partcular producer to generate more TGCs (more green electrcty than what he otherwse would have done (.e. the margnal generaton cost s equal to margnal revenue for both technologes. A producer wth w, must have λ > 0. For ths case condton 13 says that the margnal revenue of sellng TGCs should be equal to λ and thus larger than ero. In ths case the TGC system does nduce the producer to generate more TGCs (green electrcty than what he otherwse would have done. 11

12 Elmnatng λ from condtons 12 and 13, equlbrum condtons may be epressed as 7 14 p q αs 15 y α p( 16 q c '( y, p( 1 p( 17 q w s h '(, α Upon successve substtuton of the above condtons, the followng compact relatonshp appears p( 18 p( ( w (1 α c '( y αh '(, Ths condton states that the producer's margnal revenue from the electrcty and the TGC markets s equal to a lnear combnaton of the ndvdual producer's margnal cost of provdng black and green electrcty, wth the percentage requrement as the combnaton weght Trade between two countres In ths part we consder two countres, A and B, (such as Norway and Sweden that trade both electrcty and green certfcates wth each other. In ths settng polcy measures taken n one country may effect the decsons made n the other country. 7 Observe that condton 15 assumes an nteror soluton for the TGC prce. The reason for ths s that the change of the TGC prce followng from a change n the sale of TGCs s equal to ero f the TGC prce s at the prce bounds. In such a case there would be no dfference between optmalty condtons of the present market settng and the market settng consdered above (.e. market power n the electrcty market only. 8 The addtonal market power that a producer of green electrcty may eercse s reflected n the margnal revenue functon that- n addton to the amount of electrcty sold, - also contans the number of TGCs sold by the producer, generated,.e. equaton 18,.e. w w. Hence, f the producer fnds t optmal to sell all TGCs, green electrcty counts twce n the margnal revenue functon of p( p ( ( y 2. 12

13 Trade n electrcty only Under autarky each country wll have to satsfy the same general set of equlbrum condtons (e.g. condtons 1 4 for perfect competton or condtons for Cournot behavor n both markets. Prces and quanttes wll, however, be specfc to each country as determned by the demand functon, the cost functons and the polcy measure appled (percentage requrement and TGC prce bounds. Openng for trade n electrcty whle stll keepng separate TGC markets, the electrcty wholesale prce wll become the same n both countres (.e. q q q. Consderng the most A B general case of Cournot behavor n both markets we have (other market settngs may easly be derved from these condtons by puttng relevant prce dervatves equal to ero 19 p q α s 20 y y 21 A B A A B B y α p( 22 q c '( y,,, A, B p( w 23 ( q s h '(,,, A, B α Observe that the common wholesale market mples that the dervatves of end-user prces wll be the same for both countres even though end user prces may be dfferent. Ths follows from the fact that q p ( α s p ( α s A A A A B B B B and the assumpton that the TGC prce s consdered as gven when operatng n the electrcty market. Trade n both electrcty and TGCs Openng for trade n certfcates, the TGC prces wll be equated and become the same for both countres (.e. s s s at a level ntermedate to the ntal TGC A B prces of the two countres. In ths settng there s a need for an addtonal varable and 13

14 an addtonal equaton (statng that total certfcates appled must be equal to total certfcates sold to descrbe the equlbrum soluton. Hence, we descrbe the number of certfcates used n country by v. Net mport of certfcates for country s then equal to v w. The set of equlbrum condtons now reads 24 p q α s 25 y y 26 A B A A B B v y v α 27 v v w w A B A B p( 28 q c '( y,,, A, B p( w 29 ( q s h '(,,, A, B α 4. Numercal model It has been ponted out that there s an ndetermnacy of the effects on green capacty of an ncrease of the percentage requrement and that the precse results depend on the parameters of the problem. Ths goes for both TGC markets under autarky as well as for ntegrated TGC markets. In order to evaluate the effects of ntroducng a ont TGC market n the Nordc countres and n partcular a ont Norwegan-Swedsh market, t may thus seem lke a good dea to apply numercal models wth realstc parameter values. In a study by Bergman and Radetk (2003 a numercal model has been appled to nvestgate the effects of a Swedsh TGC market on green electrcty generaton and electrcty trade wthn the Nordc power market. Only Sweden s assumed to have a TGC market. Among other results the study shows that the net eport of electrcty to the other Nordc countres wll ncrease a lot (.e. by 5.2 TWh. Ths somewhat surprsng result s eplaned by a hgh equlbrum prce of TGCs and the resultng low net cost of generatng green electrcty n Sweden. Hence, the ntroducton of a TGC system n Sweden sgnfcantly affects the nvestment decsons n the electrcty 14

15 ndustry. However, as Sweden s the only country applyng a TGC system, the effect on the common Nordc electrcty wholesale prce s rather small 9. To further nvestgate these relatonshps a numercal model based on the prncples of the analytcal model developed above s desgned to take care of trade n both electrcty and TGCs between Sweden and Norway. Just as the analytcal model the numercal model may take account of market power n both the electrcty market and the TGC market. The basc assumptons of the model are as follow: Electrcty generaton takes place n maor frms (3-5 wth Cournot behavour plus a frnge wth compettve behavour for each country Step-wse ncreasng lnear margnal cost curves, reflectng unt costs and capacty lmts for varous technologes Green electrcty encompasses electrcty generated by wnd, water and bomass. However, only electrcty generaton n new small water power plants are consdered green, whereas electrcty generaton n estng water power plants are consdered black 10 ust as electrcty generated n nuclear-, gas-, coal-, and ol power plants. Free-trade n electrcty but nter-connector capacty lmts may lead to dfferent wholesale prces n the varous countres Autarky or free trade n the TGC market Perfect competton or Cournot behavour for the maor frms and perfect competton for the frnge n the TGC market Constant elastc demand curves n each country (prce elastcty: -0,3 The model determnes equlbrum prces and quanttes on, and cross border tarffs between, the electrcty markets n Denmark, Fnland, Norway and Sweden. Also, t determnes equlbrum prces and trade on the markets for TGCs n Norway and Sweden. 9 In broad, these conclusons seem to be n lne wth other model smulaton studes of the effects of TGC systems n the Nordc countres (see Hndsberger et al., 2003 and Unger and Ahlgren, For Norway black electrcty generaton s almost eclusvely takng place n water power plants whereas black electrcty generaton n Sweden also ncludes electrcty from nuclear-, gas- and coal power plants. 15

16 In the followng we address the queston as to how a requrement of havng a certan percentage of green electrcty affects the electrcty market under autarky and under trade of TGCs as market power s eercsed. The case of no TGC markets at all s consdered as a benchmark. The focus s on the year Domestc TGC markets wth market power and trade n electrcty only Specfc assumptons made for ths case are A TGC market for Sweden wth a percentage requrement of 8,4% A TGC market for Norway wth a percentage requrement of 4,5% The frnge s constraned by a generaton capacty of green electrcty totallng 5 TWh n both countres Cournot behavour of maor frms and compettve behavour of the frnge on both TGC markets No trade of TGCs No TGC markets for the other Nordc countres Comparng wth the case of no TGC markets n any of the Nordc countres (the base case the model shows that the ntroducton of TGC markets gve rse to the followng changes (see Table 1 The Norwegan end-user prce s reduced and the Norwegan electrcty consumpton s ncreased The Swedsh end-user prce s ncreased and the Swedsh electrcty consumpton s reduced The aggregate electrcty consumpton n the two countres decreases The (common wholesale prce of electrcty s reduced The TGC prce n Sweden becomes larger than the Norwegan TGC prce In Norway, all TGCs generated are sold In Sweden, TGCs are held back from the market (correspondng to 1,4 TWh Hence, the ntroducton of TGC markets wth Cournot behavour does stmulate green electrcty generaton and as epected- nfluences prces and quanttes n the electrcty markets, notably for Sweden. 16

17 Table 1. Model smulatons of quantty (TWh and prces (SEK/MWh on the electrcty and TGC markets. Assumptons stated n the man tet. Total electrcty consumpton Green electrcty consumpton Green electrcty producton Wholesale prce of electrcty Prce of TGCs End-user prce of electrcty No TGC markets Separate TGC markets Market power Trade n TGCs Market power Trade n TGCs Perf. competton Norway Sweden Norway Sweden Norway Sweden Norway Sweden 121,3 156,9 121,4 155,0 121,3 155,3 121,3 155,4 0 2,8 5,5 13,0 5,5 13,0 5,5 13,0 0 2,8 5,5 14,4 5,0 14,2 3,7 14,8 24,0 24,0 22,9 22,9 23,0 23,0 23,1 23, ,0 26,6 22,8 22,8 20,9 20,9 24,0 24,0 23,9 25,1 24,0 24,9 24,0 24,9 Trade and market power for both markets In the net case consdered a common TGC market s ntroduced for Norway and Sweden. It s assumed that the maor frms stll eercse market power n the TGC market. Compared wth the prevous case the effects of TGC trade on end-user prces and consumpton are to some etent counteracted. Indeed, for Norway the end-user prce and consumpton s back to what t was n the base case. For Sweden, end-user prce and consumpton of electrcty get somewhat closer to those of the base case The (common wholesale prce ncreases somewhat as compared wth the prevous case and thus gets closer to what t s n the base case 17

18 The prce of TGCs s the same n both countres and s lower than ether of the TGC prces for the prevous case The generaton of green electrcty falls both n Norway and Sweden Norway generates less green electrcty than t consumes and mports TGCs from Sweden Less TGCs are held back from the market as compared wth the prevous case (.e. correspondng to 0,7 TWh The consumpton of green electrcty (.e. use of TGCs s appromately the same as n the prevous case for each of the countres Trade and perfect competton for both markets The assumptons are the same as for the prevous case, ecept that all producers act compettvely on the TGC market. Compared wth the prevous case we get the followng results For Norway, end-user prce and consumpton reman the same. For Sweden there s a further slght ncrease of consumpton and a further slght reducton of end-user prce. There s a further ncrease of the (common wholesale prce of electrcty for both countres There s a further reducton of the TGC prce Norway reduces ts generaton of green electrcty whle Sweden ncreases ts green electrcty generaton, but total generaton of green electrcty s reduced Norway mports TGCs from Sweden No TGCs are held back from the market. The consumpton of green electrcty (.e. use of TGCs s appromately the same as n the prevous case for each of the countres There s an ncrease of the combned electrcty consumpton n Norway and Sweden The cases consdered above show that market openng of the TGC markets comes a long way n elmnatng the negatve effects of market power n the TGC markets. Wth trade n TGCs end-user prces and consumpton are practcally speakng the 18

19 same wth and wthout market power. Also, the wholesale prces are close to beng the same, whle some dfferences n the TGC prces reman. 5. Concludng remarks Wth the parameter values appled, s looks as f the ont TGC market functons as epected for Norway and Sweden. In partcular, t seems lke the TGC market mechansm does have the postve effect on green electrcty generaton as ntended and that ths takes place wthout dstortng total electrcty consumpton sgnfcantly. Dependng on market form and tradng optons for TGCs total generaton of green electrcty wll ncrease by TWh for the two countres combned, whle total electrcty consumpton s reduced by appromately 1-1,5 TWh. The adustments, thus, mply a crowdng out effect for black electrcty and a redstrbuton of producer surplus from black electrcty generaton to green electrcty generaton. Wth respect to prce effects from ntroducng markets for TGCs, the wholesale prce wll fall whereas the end user prce n Norway remans more or less unaffected. The end user prce n Sweden ncreases somewhat. Wth respect to the queston of market power t turns out that companes possessng capacty for green electrcty generaton may eercse market power by wthholdng TGCs. Ths s partcularly true for the case where Norway and Sweden have separate domestc markets for TGCs. However, the analyss reveals that an openng of TGC trade between the two countres to a large etent acheves the obectve of elmnatng the use of market power that would otherwse be establshed on the separate domestc markets for TGCs. The usual reason for ths apples.e. that the market enlargement makes each sngle producer relatvely less domnatng and less potent when t comes to nfluencng prce. It should be noted, however, that market power on the common TGC market gves rse to rather hgh TGC prces as the percentage requrement gets harsher. Indeed the prce may be so hgh that the penalty prce s reached. Ths may lead to large changes n the functonng of the markets, as the percentage requrement wll no longer be effectve because the retalng companes may pay the penalty nstead of purchasng 19

20 TGCs. 11 For Sweden the problem of payng the penalty rather than purchasng TGCs has been observed among retalng companes 12. However, Sweden s about to leave the system of a fed penalty prce n favour of a system of varable penalty prce (.e. set at 150% of last years average TGC prce. For Norway nothng has yet been decded wth respect to the penalty system. Presumably ths wll be coordnated wth the Swedsh system. In concludng ths paper t should be noted that the success of ntroducng TGC markets not only depends on the ablty to mtgate market power but also on other factors. The queston of compatblty of the TGC system wth other envronmental nstruments, notably the CO 2 emsson permt system (the ETS-system has already been mentoned. Otherwse, the possble large volatlty of TGC prces may also be of sgnfcance n ths respect. In Denmark, for nstance, wnd power may vary between wndy years and calm years wth an annual varaton of 25% as compared wth the annual average. As the margnal cost of wnd power generaton s close to ero for estng capactes compettve wnd power generators wll at all tmes produce what s feasble and thus generate erratc and prce nelastc supply. Hence, the number of TGCs ssued and avalable for sale wll also be hghly volatle and ths wll lead to a consderable uncertanty wth respect to the remuneraton (.e. the sum of the TGC prce and the wholesale prce of nvestment n green technologes. Ths n ts turn may also nfluence the requred rate of return for nvestors n renewable electrcty.e. the requred rate of return would be hgher as compared wth what would be necessary f subsdes were stable and certan. However, an ntegraton of the Swedsh TGC market wth a Norwegan TGC market would be a remedy to ths problem as wnd varatons n varous parts of Sweden and Norway are probably not very correlated. Hence, an etenson of the TGC market to nclude both countres would work so as to stable TGC prces. Otherwse, bankng of TGCs s an effcent way of dampenng prce oscllatons. 11 In the Nordc power market penalty payments are not recycled to producers of green electrcty, as s the case n the UK system (see Butler and Neuhoff, The recyclng rule of the UK system probably leads to even larger market power potental of green electrcty producers than what s the case for the Nordc counterpart. 12 See 20

21 Lterature Amundsen, E.S. and J.B. Mortensen (2001 The Dansh green certfcate system: Some smple analytcal results, Energy Economcs, 23, Amundsen, E.S. and G. Nese (2002 Provson of renewable energy usng green certfcates: Market power and prce lmts, Workng paper No. 25/02, Department of Economcs, The Unversty of Bergen. Bergman, L. and M. Radetk (2003 Global klmatpoltk, SNS Förlag, Stockholm. Butler, L. and K. Neuhoff (2004 Comparson of Feed n Tarff, Quota and Aucton Mechansms to support Wnd Power Development, Workng Paper Department of Appled Economcs, Unversty of Cambrdge. Fnon, D. and P. Menanteau (2003 "The Statc and Dynamc Effcency of Instruments of Promoton of Renewables", Energy Studes Revew, 12(1: Hndsberger, M. et al. (2003 Co-estence of electrcty, TEP, and TGC markets n the Baltc Sea Regon, Energy Polcy, 31, pp Jensen, G. and K. Skytte (2002 "Interactons between the power and green certfcate markets", Energy polcy, 30, Nese, G. (2003 Essays n Lberaled Energy Markets Doctoral dssertaton, Department of Economcs, The Unversty of Bergen Platts (2004 UK Renewables Certfcates Market, McGraw-Hll Unger, T. and E.O. Ahlgren (2003 Impacts of a common green certfcate market on electrcty and CO 2 emsson markets n the Nordc countres n T. Unger Common energy and clmate strateges for the Nordc countres A model analyss, Doctoral dssertaton, Chalmers Unversty of Technology, Göteborg, Sweden 21