The progressive inefficiency of replacing renewable obligation certificates with contracts-for-differences in the UK electricity market

Bunn, D W and Yusupov, T (2015) The progressive inefficiency of replacing renewable obligation certificates with contracts-for-differences in the UK electricity market. Energy Policy, 82 (July). pp. 298-309. ISSN 0301-4215

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Abstract

This paper looks at the emerging risk/return profile for new renewable assets as a conventional wholesale electricity market progressively decarbonises. Using a detailed fundamental model of price formation risks, under increasing replacement of fossil fuel facilities with onshore and offshore wind, we show that the risk return profile becomes less attractive over time, and may therefore need sustained and possibly increasing policy support. Furthermore, we show that green certificate trading may become progressively more attractive as a supplementary support to wholesale prices, compared to fixed feed-intariffs. This is because the increasingly negative correlation between renewable output and wholesale prices reduces its revenue risk compared to fixed feed-in tariffs, if other factors remain constant, and thereby improves conventional financial performance risk metrics. In particular, this suggests that the recent energy policy change in Britain to move away from green certificates and into contracts-for-differences may have been ill-founded.

Item Type: Article
Additional Information: © 2015 Elsevier
Subject Areas: Management Science and Operations
DOI: 10.1016/j.enpol.2015.01.002
Date Deposited: 02 Mar 2016 18:51
Last Modified: 26 Aug 2016 14:58
URI: http://lbsresearch.london.edu/id/eprint/85

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