Producer incentives in electricity markets with green quotas and tradable certificates

We study both intended and unintended consequences of cost reductions by green producers in a competitive electricity market operated under a green quota enforced via a green certificate system. We show that green producers may not have an incentive to exploit the full cost reduction potential of their technology and can in general be expected to engage in strategic cost padding. We propose a method of incentivizing RE producers to exploit the full cost reduction potential of the green technology. The method allows for strategic cost padding, but only at the expense of profit reducing changes in the RE quota.