ADAPT: A Price-Stabilizing Compliance Policy for Renewable Energy Certificates: The Case of SREC Markets

Javad Khazaei (), Michael Coulon () and Warren B. Powell ()
Additional contact information
Javad Khazaei: Department of Operations Research and Financial Engineering, Princeton University, Princeton, New Jersey 08540
Michael Coulon: Department of Business and Management, University of Sussex, Brighton BN1 9SL, UK
Warren B. Powell: Department of Operations Research and Financial Engineering, Princeton University, Princeton, New Jersey 08540

Operations Research, 2017, vol. 65, issue 6, 1429-1445

Abstract: Currently, most Renewable Energy Certificate (REC) markets are defined based on targets that create an artificial step demand function resembling a cliff. This target policy produces volatile prices that can make investing in renewables a risky proposition. In this paper, we propose an alternative policy called Adjustable Dynamic Assignment of Penalties and Targets (ADAPT) that uses a sloped compliance penalty and a self-regulating requirement schedule, both designed to stabilize REC prices, helping to alleviate a common weakness of environmental markets. To capture market behavior, we model the market as a stochastic dynamic programming problem to understand how the market might balance the decision to use a REC now versus holding it for future periods (in the face of uncertain new supply). Then, we present and prove some of the properties of this market, and finally we show that this mechanism reduces the volatility of REC prices, which should stabilize the market and encourage long-term investment in renewables.

Keywords: compliance policy; renewable energy certificates; stochastic dynamic programming; price volatility; mechanism design (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://doi.org/10.1287/opre.2017.1641 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:65:y:2017:i:6:p:1429-1445

Access Statistics for this article

More articles in Operations Research from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().