The Price and Volatility Dynamics in the Swedish-Norwegian Renewable Electricity Certificate MarketA Study of Spillover Effects and Regulatory changes

Abstract: The market for renewable electricity certificates (REC) is the primary support system for renewable energy in Sweden and Norway. Regulatory uncertainty and equity markets have previously been proven to impact the volatility of the REC spot contract. As policy makers, renewable electricity investors and other stakeholders aim for profitability and efficient regulation, additional insights of the dynamics in the  REC market is needed. This study examines regulatory uncertainty on both REC spot  contract and forward contracts by estimating breakpoints on GARCH variance using the  Bai-Perron (1998) procedure. Spillover  effects from Brent Crude Oil, OSEBX and OMXS30 to the REC contracts are estimated using the Cross-Correlation Function. Significant break points linked to regulatory  events in the market are found in all of the  REC contracts. The REC spot contract is  found to be independent of Brent Crude Oil but affected by the OSEBX and OMXS30. Significant spillovers from Brent Crude Oil and equity markets are found in all of the forward contracts.