The battle for decarbonisation is being lost. We are way off track in limiting global warming to 1.5°C, or even to 2°C. According to the IMF (2022), US$1 trillion is needed in energy infrastructure investment before 2030 to enable greenhouse gas mitigation in emerging economies.
Recently, Chile managed to more than double the proportion of electricity it generates from renewable energy, going from solar and wind power generating 10% of the total electricity in 2017, to almost 28% of the total electricity in 2022 (Generadoras de Chile 2022). When all the renewable energy generation sources are considered, including hydroelectric, geothermal and biomass, the percentage of renewable generation at the end of 2022 surpassed 55% of the total, higher than the 45% of thermal generation.
However, a worrying development is the significant curtailment of generated renewable energy. This is caused by the difficulties in transporting generated energy due to the lack of transmission lines that connect large consumption centres. For instance, up to 290 Gigawatt hours of wind and solar power-generated energy was not used in 2022 (ACERA 2022).
One of the obstacles that countries face in accelerating their transition to a low-carbon economy is shortening the distance between consumption centres (e.g. large cities) and renewable energy sources (solar, wind, and others). These barriers being eliminated by better transmission infrastructure can cause an expansion in the production and use of renewable energy.
We examine this question by providing a theoretical and empirical analysis of the impact of market integration on renewables expansion and allocative efficiency in wholesale electricity markets (Gonzales et al. 2022). We begin by developing a simple theoretical model that characterises the static and dynamic impacts of market integration. We assume market integration does not affect producers’ entry decisions in the static scenario. In this case, the value of market integration can be summarised by a conventional definition of gains from trade. Market integration allows lower-cost power plants to export and replaces production from higher-cost power plants, which reduces the overall cost of electricity production.
Likewise, considering the dynamic impact of market integration makes it possible to capture the anticipation in investor expectations and changes in supply due to the greater investment in installed capacity. By having information on market expansion, investors can make the decision to bet on the capture of expected future profitability. In the same way, greater investment changes production (supply), thus modifying the short-term or static equilibrium.
Our theory suggests that the static gains that can be estimated by a conventional analysis could substantially underestimate the full gains from market integration. To get at the full dynamic gains from trade, one would need to compare these benefits to the costs of building the line and the costs of the solar investment.