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

• Published in: Operations research 2017-11, Vol.65 (6), p.1429-1445
• Main Authors: Khazaei, Javad, Coulon, Michael, Powell, Warren B.
• Format: Article
• Language: English
• Subjects: Alternative energy; Alternative energy sources; Compliance; compliance policy; Crosscutting Areas; Dynamic programming; Environmental sustainability; mechanism design; Operations research; Planning; price volatility; Prices; Pricing; Renewable energy; renewable energy certificates; Renewable resources; stochastic dynamic programming; Stochastic models; Volatility
• ISSN: 0030-364X; 1526-5463
• DOI: 10.1287/opre.2017.1641

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.