Impacts of Market Integrations on Spatial Variation in Electricity Prices
Source: The Dynamic Impact of Market Integration: Evidence from Renewable Energy Expansion in Chile, BFI Working Paper, May 2022
The Infrastructure Investment and Jobs Act that became law in November 2021 contains significant investments to expand the nation’s transmission lines. As the Biden administration uses this funding to help carry renewable energy to new parts of the country, a study by Harris Public Policy’s Koichiro Ito and his colleagues shows doing so lowers average electricity costs and incentivizes the investment of renewables—further decarbonizing the economy.
Ito and his coauthors modeled the impacts of transmission line expansion and renewable integration and tested their predictions by studying recent evidence from Chile, which had limited transmission capacity between renewable-rich areas and demand centers until recently. In 2017, the Chilean government completed a new interconnection between these two markets and added an extension transmission line in 2019.
With a better-connected grid, the price of electricity throughout the region leveled off. Before the markets were integrated, the average price of electricity at noon in the renewable-rich region was $46.22 per megawatt hour, while it was $57.73 per megawatt hour in the highly populated region. After the integration, prices increased in renewable-rich areas, like La Serena, and decreased in the demand centers far from renewables, such as Santiago and Antofagasta. The average price leveled off at $50.16 per megawatt hour.