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The European Commission favours market-based support policies, such as markets for tradable green certificates, to promote renewable energy. Meanwhile, these markets have received critique for exposing investors to large price risk as the level of support is determined by the market price of certificates. Unstable prices can also result from changes in regulation since the demand for certificates is politically determined. Using econometric techniques and a two-step procedure, this study examines the impact of price and regulatory uncertainty in the Swedish-Norwegian tradable green certificate market. It focuses in particular on how it affects investment decisions, based on a case study of wind power projects in Sweden undertaken between 2005 to 2018. The empirical results indicate that: (1) regulatory changes negatively impact certificate markets, resulting in more volatile prices. (2) this has a deterring effect on green investments; a one standard deviation increase in price volatility is estimated to reduce the probability of project development by 12%, consistent with the predictions of real options theory and findings in previous literature. Overall, these findings provide some valuable implications for European policy makers aiming to design efficient and cost-effective future green energy policies.

The European Commission favours market-based support policies, such as markets for tradable green certificates, to promote renewable energy. Meanwhile, these markets have received critique for exposing investors to large price risk as the level of support is determined by the market price of certificates. Unstable prices can also result from changes in regulation since the demand for certificates is politically determined. Using econometric techniques and a two-step procedure, this study examines the impact of price and regulatory uncertainty in the Swedish-Norwegian tradable green certificate market. It focuses in particular on how it affects investment decisions, based on a case study of wind power projects in Sweden undertaken between 2005 to 2018. The empirical results indicate that: (1) regulatory changes negatively impact certificate markets, resulting in more volatile prices. (2) this has a deterring effect on green investments; a one standard deviation increase in price volatility is estimated to reduce the probability of project development by 12%, consistent with the predictions of real options theory and findings in previous literature. Overall, these findings provide some valuable implications for European policy makers aiming to design efficient and cost-effective future green energy policies.

In a nutshell, price cap regulation is meant to establish a quid pro quo: regulators are obliged by law to intervene only at rare, previously defined points in time, and only by imposing an upper bound on prices; firms are meant to justify regulatory restraint by adopting socially beneficial innovations. In the policy debate, a potential downside of the arrangement has featured less prominently: the economic environment is unlikely to be stable while the cap is in place. If regulators take this into account, they have to decide under uncertainty and also anticipate how regulated firms will react. In a lab experiment, we manipulate the degree of regulatory uncertainty. We compare a baseline when regulators have the same information as firms about demand with treatments wherein they receive only a noisy signal and another when they know only the distribution from which demand realizations are taken. In the face of uncertainty, regulators impose overly generous price caps, which firms exploit. In the experiment, the social damage is severe, and does not disappear with experience.

This dissertation examines the influence of attitudes, beliefs, and preferences of energy industry practitioners on investment decision-making with regard to fuel choice for new electric power plants. The conclusions are based on in-depth interviews and an extensive online survey I conducted of 600-800 energy professionals in the U.S. power sector.Chapter 1 analyzes the impact of policy uncertainty on investment decision-making in renewable energy, using the federal production tax credit (PTC) and wind energy investment as an example. It is generally understood that the pattern of repeated expiration and short-term renewal of the PTC causes a boom-bust cycle in wind power plant investment in the U.S. This on-off pattern is detrimental to the wind industry, since ramp-up and ramp-down costs are high, and players are deterred from making long-term investments.The widely held belief that the severe downturn in investment during "off" years implies that wind power is unviable without the PTC turns out to be unsubstantiated: this chapter demonstrates that it is not the absence of the PTC that causes the investment downturn during "off" years, but rather the uncertainty over its return. Specifically, it is the dynamic of power purchase agreement negotiations in the face of PTC renewal uncertainty that drives investment volatility. This suggests that reducing regulatory uncertainty is a crucial component of effective renewable energy policy. The PTC as currently structured is not the only means, existing or potential, for encouraging wind power investment. Using data from my survey, various alternative policy incentives are considered and compared in terms of their perceived reliability for supporting long-term investment.Chapter 2 introduces the concept of expected payment of carbon as a factor in investment decision-making. The notion of carbon risk (the financial risk associated with CO2 emissions under potential climate change policy) is usually incorporated into inves

This dissertation examines the influence of attitudes, beliefs, and preferences of energy industry practitioners on investment decision-making with regard to fuel choice for new electric power plants. The conclusions are based on in-depth interviews and an extensive online survey I conducted of 600-800 energy professionals in the U.S. power sector.Chapter 1 analyzes the impact of policy uncertainty on investment decision-making in renewable energy, using the federal production tax credit (PTC) and wind energy investment as an example. It is generally understood that the pattern of repeated expiration and short-term renewal of the PTC causes a boom-bust cycle in wind power plant investment in the U.S. This on-off pattern is detrimental to the wind industry, since ramp-up and ramp-down costs are high, and players are deterred from making long-term investments.The widely held belief that the severe downturn in investment during "off" years implies that wind power is unviable without the PTC turns out to be unsubstantiated: this chapter demonstrates that it is not the absence of the PTC that causes the investment downturn during "off" years, but rather the uncertainty over its return. Specifically, it is the dynamic of power purchase agreement negotiations in the face of PTC renewal uncertainty that drives investment volatility. This suggests that reducing regulatory uncertainty is a crucial component of effective renewable energy policy. The PTC as currently structured is not the only means, existing or potential, for encouraging wind power investment. Using data from my survey, various alternative policy incentives are considered and compared in terms of their perceived reliability for supporting long-term investment.Chapter 2 introduces the concept of expected payment of carbon as a factor in investment decision-making. The notion of carbon risk (the financial risk associated with CO2 emissions under potential climate change policy) is usually incorporated into inves

Disagreement over the form of regulation of greenhouse gasses motivates a comparison of market based and command and control policies. More efficient policies can increase aggregate marginal abatement cost, resulting in higher emissions. Multiple investment equilibria and “regulatory uncertainty” arise when firms anticipate command and control policies. Market based policies eliminate this uncertainty. Command and control policies cause firms to imitate other firms’ investment decisions, leading to similar costs and small potential efficiency gains from trade. Market based policies induce firms to make different investment decisions, leading to different costs and large gains from trade. We imbed the regulatory problem in a “global game” and show that the unique equilibrium to that game is constrained socially optimal.

Disagreement over the form of regulation of greenhouse gasses motivates a comparison of market based and command and control policies. More efficient policies can increase aggregate marginal abatement cost, resulting in higher emissions. Multiple investment equilibria and “regulatory uncertainty” arise when firms anticipate command and control policies. Market based policies eliminate this uncertainty. Command and control policies cause firms to imitate other firms’ investment decisions, leading to similar costs and small potential efficiency gains from trade. Market based policies induce firms to make different investment decisions, leading to different costs and large gains from trade. We imbed the regulatory problem in a “global game” and show that the unique equilibrium to that game is constrained socially optimal.