Modeling and analysis of renewable energy obligations and technology bandings in the UK electricity market

In the UK electricity market, generators are obliged to produce part of their electricity with renewable energy resources in accordance with the Renewable Obligation Order. Since 2009 technology banding has been added, meaning that different technologies are rewarded with a different number of certificates. We analyze these two different renewable obligation policies in a mathematical representation of an electricity market with random availabilities of renewable generation outputs and random electricity demand. We also present another, alternative, banding policy. We provide revenue adequate pricing schemes for the three obligation policies. We carry out a simulation study via sampling. A key finding is that the UK banding policy cannot guarantee that the original obligation target is met, hence potentially resulting in more pollution. Our alternative provides a way to make sure that the target is met while supporting less established technologies, but it comes with a significantly higher consumer price. Furthermore, as an undesirable side effect, we observe that a cost reduction in a technology with a high banding (namely offshore wind) leads to more CO2 emissions under the UK banding policy and to higher consumer prices under the alternative banding policy.