RIETI Report March 11 2022

Does Market Integration Help to Expand Renewable Energy?

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Welcome to RIETI Report.
This bi-weekly newsletter will keep you updated with the recent columns, event information and research results by RIETI fellows and other leading economists in Japan and around the world.

In this edition, we present topics related to a challenge that many countries are facing in expanding renewable energy due to lack of market integration. Koichiro Ito exploits changes that recently occurred in the Chilean electricity market to examine the impact of market integration.
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Editors of RIETI Report (Facebook: @en.RIETI / Twitter: @RIETIenglish / URL: https://www.rieti.go.jp/en/)

This month's featured article

Does Market Integration Help to Expand Renewable Energy?

ITO KoichiroVisiting Fellow, RIETI

Effective and economical expansion of renewable energy is one of the most urgent and important challenges for addressing climate change. The electricity sector generates one of the largest shares of global greenhouse gas emissions along with the transportation sector. In addition, a significant part of the transportation sector is expected to be electrified in the near future. Decarbonizing electricity generation is therefore critical to addressing climate change.

Many countries are facing a challenge

However, many countries are facing a challenge in expanding renewable energy because existing network infrastructures (i.e., transmission networks) were not originally built to accommodate renewables. Conventional power plants, such as thermal plants, were able to be placed reasonably close to demand centers (e.g. large cities), and therefore, minimal transmission networks were required to connect supply and demand. However, renewable energy, such as solar and wind, are often best generated at locations that are far from demand centers.

Two problems arise from the lack of market integration between renewable-intensive regions and demand centers. First, when renewable supply exceeds local demand, electricity system operators have to curtail electricity generation from renewables to avoid system breakdowns, even though this means that operators need to discard the zero-marginal cost electricity produced from renewables. This curtailment indeed occurs in many electricity markets. Second, because the marginal cost of renewable electricity is near zero, local market prices in renewable-intensive regions tend to be low and often become negative when it cannot be exported to demand centers. These two problems discourage both new entries and investment in renewable power plants. Indeed, many countries have started to realize these problems are among the first-order policy questions. For example, the Biden administration in the United States considers investment in transmission lines and renewable energy to be a key part of the infrastructure bill, currently proposed to be 1.75 trillion US dollars.

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