Optimal Management of Green Certificates in the Swedish–Norwegian Market
39 Pages Posted: 15 Jun 2017
There are 2 versions of this paper
Optimal Management of Green Certificates in the Swedish-Norwegian Market
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
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