Renewable Energy Policy Instruments and Market Power

Markets for green certificates allow generators with market power to squeeze the margins of their competitors, as a generator that is vertically integrated into network activities might do. We analyze this issue in a stylized electricity industry in which a dominant producer of both conventional and renewable energy is facing a competitive fringe of renewable‐energy producers. We demonstrate that whether or not a dominant firm is vertically integrated into network activities, it can disadvantage the fringe producers by distorting certificates prices, thereby inducing cost inefficiency in the generation of renewable energy. We compare green certificates to a system of feed‐in tariffs, where a similar margin squeeze is not possible.