An equilibrium market power model for power markets and tradable green certificates, including Kirchhoff's Laws and Nash-Cournot competition

Abstract

We investigate the economic impacts of introducing tradable green certificates to promote electricity produced from renewable energy sources. We formulate a mixed complementarity, multi-region, partial equilibrium model, clearing both the electricity and green certificate markets under the assumption of Nash-Cournot market competition. We introduce a mixed complementarity formulation of the tradable green certificate policy scheme. The main contribution of this paper is to combine a public support scheme for electricity production with a power market model in which strategic generators compete and exercise market power in a capacitated transmission network with spatial energy exchange.Any policy instrument interfering with the free market solution in a partial equilibrium model will reduce social welfare as a result of deadweight losses from the policy. These welfare losses may be substantial. We show that losses from tradable green certificates influence different market actors depending on the market conditions, but existing firms are likely to bear most of these losses.In markets with Cournot competition, where producers act strategically, green certificates help to increase market competition if new firms are able to enter the market. Existing firms will not be motivated to compete with new generation capacity. The consumer surplus from introducing tradable green certificates under Cournot competition may increase, despite the deadweight losses the policy incurs.