The Infrastructure Investment and Jobs Act signed into 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 new study shows doing so lowers average electricity costs and incentivizes the investment of renewables—further decarbonizing the economy.
“Electricity generation makes up a significant portion of carbon emissions, with the sector’s contribution only set to increase in the coming years as more electric vehicles get added to the grid. Expanding renewable energy is therefore vital to addressing climate change,” says Koichiro Ito, a co-author of the study and associate professor at the University of Chicago’s Harris School of Public Policy. “While a decade ago the main impediment was technological—wind and solar were not cost competitive—today the challenge is being able to deliver renewable energy from the areas where it is abundant to the areas where there is the highest demand. That takes expanding transmission lines.”
Ito and his co-authors, Luis Gonzales of the Pontifical Catholic University of Chile and Mar Reguant of Northwestern University, 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 and decreased in the demand centers far from renewables. But the average price leveled off at $50.16 per megawatt hour.
The grid expansion also led to an increase in renewable generation, as lower-cost renewable plants replaced higher-cost fossil fuel plants in some cases. Renewable investors also saw the announcement of the market integration as an opportunity to invest. As a result of these factors, solar generation increased by 51 percent in Chile, while the cost per megawatt hour of electricity decreased by 12 to 5 percent.
The authors found that the costs of making these investments to expand the grid are quickly recovered. In the case of Chile, the investments were paid back in less than 5.5 years due to the long-run benefits to the environment and people’s health, particularly in the form of reduced air pollution.
“When weighing whether to invest in new transmission lines, policymakers should consider not only the direct benefits of carrying renewable energy to new areas, but also the fact that the expansion incentivizes the investment of new renewable power, becoming an important market force that leads to further decarbonization,” Ito says. “These costs also pay back as fossil fuels get displaced, having the co-benefit of reduced air pollution and other environmental and health improvements.”