RIETI Report February 10, 2023

Market integration and the expansion of renewable energy: Evidence from Chile

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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 market integration and the expansion of renewable energy. Using evidence from Chile, Professor Luis E. Gonzales of Pontificia Universidad Catolica de Chile, RIETI Visiting Fellow Koichiro Ito and Professor Mar Reguant of Northwestern University look at the impact of the integration of two previously separate electricity markets on renewable expansion.

We hope you will enjoy it. If you have any feedback, we would love to hear from you (news-info@rieti.go.jp).
Editors of RIETI Report (Facebook: @en.RIETI / Twitter: @RIETIenglish / URL: https://www.rieti.go.jp/en/)

This month's featured article

Market integration and the expansion of renewable energy: Evidence from Chile

Luis E. GONZALESProfessor of Economics, Institute of Economics at Pontificia Universidad Católica De Chile

ITO KoichiroVisiting Fellow, RIETI

Mar REGUANTResearch Fellow at Barcelona School Of Economics, Vice President, Climate at Centre for Economic Policy Research, Professor at Northwestern University

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. This column looks at the impact of the integration of two previously separate electricity markets in Chile on renewables expansion and allocative efficiency. The authors find that connecting these markets by expanding electricity transmission lines reduced regional price disparities in electricity, boosted renewable energy, and lowered the overall cost of electricity.

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 has managed to more than double the proportion of electricity it generates from renewable energy, going from solar and wind power generating 10% of total electricity in 2017 to almost 28% of 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).

To read the full text:

Related article

“Does Market Integration Help to Expand Renewable Energy?”
ITO Koichiro (Visiting Fellow, RIETI)

Related papers

“The Dynamic Impact of Market Integration: Evidence from renewable energy expansion in Chile”
Luis E. GONZALES (Pontificia Universidad Catolica de Chile and CLAPES UC) / ITO Koichiro (Visiting Fellow, RIETI) / Mar REGUANT (Northwestern, BSE, CEPR, and NBER)

“Impact of the Rapid Expansion of Renewable Energy on Electricity Market Price: Using machine learning and Shapley Additive Explanation”
SHIMOMURA Mizue (Kyushu University) / KEELEY Alexander Ryota (Kyushu University) / MATSUMOTO Ken'ichi (Toyo University) / TANAKA Kenta (Musashi University) / MANAGI Shunsuke (Faculty Fellow, RIETI)

“Assessing the Impact of Renewable Energy Sources: Simulation analysis of the Japanese electricity market”
YOSHIHARA Keisuke (University of Tokyo) / OHASHI Hiroshi (Faculty Fellow, RIETI)

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