The expansion of renewable energy faces challenges in numerous locations due to outdated grids designed for conventional power plants built near high-demand centers. Renewable energy plants require distinct infrastructure, as they need to be situated far from demand centers, given the nature of sources like wind and solar. The absence of market integration between renewable-rich areas and demand centers results in excess generation – leading to curtailment- and low local market prices, discouraging new investments. This poses a significant obstacle for countries prioritizing renewable energy expansion and hinders decarbonization efforts.
This paper explores the impact of market integration on renewable expansion and allocative efficiency in wholesale electricity markets through theoretical and empirical analyses. The theoretical model, considering market integration with and without investment effects, reveals that the conventional gains from trade apply when investment is held constant. However, anticipating market integration prompts producers to invest in new capacity, altering the supply curve (Figure 1). Building on this insight, the authors empirically quantify these theoretical predictions by exploiting two significant changes in the Chilean electricity market.
The paper conducts a descriptive analysis of market integration outcomes. Before the interconnection, Atacama exhibited near-zero prices due to zero- marginal-cost solar generation. Following the interconnection, prices became positive, and the gap between Atacama and Antofagasta disappeared, a pattern that was repeated between Santiago and Atacama after the 2019 reinforcement. The study then builds a structural model to assess how market integration and investment effects influence solar plant entry. This model comprises a weekly economic dispatch model and an investment model. The paper concludes that prices align with theoretical predictions and emphasizes the need to consider investment effect
