This paper analyzes financial risks in a market for Tradable Green Certificates (TGC), both from the perspective of existing renewable producers and potential investors in new renewable electricity generation capacity. The pricing mechanism for a consumer-based TGC market with perfect competition is described. A TGC system with wind turbines as the sole technology is analyzed. In this framework production from wind turbines and TGC prices will be negatively correlated, implying that a distinction between revenue and price fluctuations is important. Finally analytical expressions for revenue-variance-minimizing trading strategies are derived and an analysis of the demand and supply for financial hedging show that forward contracts will be traded at a risk premium.

We examine the effects of energy derivatives trading on the crude oil market. There is a common public and regulatory perception that derivative securities increase volatility and can have a destabilizing effect on the underlying market. Consistent with this view, we find an abnormal increase in volatility for three consecutive weeks following the introduction of NYMEX crude oil futures. While there is also evidence of a longer-term volatility increase, this is likely due to exogenous factors, such as the continuing deregulation of the energy markets. Subsequent introductions of crude oil options and derivatives on other energy commodities have no effect on crude oil volatility. We also examine the effects of derivatives trading on the depth and liquidity of the crude oil market. This analysis reveals a strong inverse relation between the open interest in crude oil futures and spot market volatility. Specifically, when open interest is greater, the volatility shock associated with a given unexpected increase in volume is much smaller.