Renewable-based generation expansion under a green certificate market

Highlights

Quota obligations and green certificates incentive renewable generation expansion.

The no-compliance penalty value significantly impacts the foreseen installed capacity.

Proper penalty values lead to desired renewable shares and maximum social welfares.

The optimal penalty values are affected by the competition degree among producers.

The exercise of market power reduces the installed capacity of renewable generation.

Abstract

Quota obligations represent a policy instrument to reduce carbon emissions and incentivize renewable-based electricity generation. This support scheme places an obligation on generating companies to comply with a quota of renewable-based production. Eligible renewable units receive one certificate for each MWh, while fossil-based generating companies must buy certificates to comply with the requirement. This paper proposes a family of generation expansion models that include both an electricity and a certificate market to investigate to which degree a given quota obligation and non-compliance penalty incentivize the capacity expansion of renewable-based generation. Two market players are considered, namely, a renewable-based generating company with null operating cost and a weather-dependent capacity factor; and a fossil-based generating company with a fixed capacity and known fuel cost function. First, a complementarity model that determines the optimal capacity of the renewable-based producer considering a perfectly competitive market is proposed. Next, market players are assumed to compete in quantities à la Cournot to maximize their profits, being the generation expansion model formulated as a mathematical problem with equilibrium constraints. The relevance of properly setting the non-compliance penalty for each level of competition to comply with a given quota obligation is quantified and discussed using an stylized example.

Keywords

  • Generation expansion;
  • Renewable energy;
  • Electricity market;
  • Renewable energy certificates;
  • Competition

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