Market Integration and Renewable Energy – Energy Institute Blog

New research explores the economic benefits of recent transmission investments in Chile.

Total installed solar capacity in Chile now exceeds a whopping 4.4 GW. That’s 20% of all the installed solar in Latin America, despite Chile having less than 3% of the region’s population.

In a previous post, I gave four reasons why Chile is such an attractive market for solar: (1) rising electricity demand, (2) world-class solar resources, (3) limited natural gas and coal, and (4) commitment to the free market.

Today I want to add a fifth reason – (5) a robust transmission network. A terrific new paper by Luis Gonzalez, Energy Institute alum Koichiro Ito, and Mar Reguant examines the short- and long-run impacts of recent transmission investments in the Chilean electricity market, documenting large economic benefits.

Golden Link

The Atacama Desert in Northern Chile is high, flat, and bone dry — the ideal location for solar. By some measures, the Atacama is the driest place on the planet. Some parts of the desert have never seen a drop of rain in 400+ years. The sun beats down day after day with some of the highest levels of solar irradiance anywhere in the world.

World-class solar resources are available throughout the Atacama, stretching 1000 kilometers from 18 degrees south latitude in the north to 29 degrees south latitude in the south. The challenge is, however, that not many people live that far north. The mining industry is in the north, but most of Chile’s population and thus, most of the demand for electricity, is found 1000 kilometers further to the south around Santiago at 34 degrees latitude.

One option would be to build solar close to Santiago. The problem is that solar irradiance around Santiago is at least 20% lower, significantly reducing the value of the investment. It’s often the case with renewables that the best resources are not located where electricity is most valuable.

Until 2017, Chile’s northern (SING) and central (SIC) electricity grids were completely separated with no interconnection between them. As shown in the maps below, the Chilean government completed a new interconnection in November 2017, and a reinforcement transmission line in June 2019. Both expansions were double circuit 500kV transmission lines with enough capacity to significantly integrate SING and SIC.

Price Convergence

The authors first examine the impact of market integration on wholesale electricity prices. The figure below plots the difference in wholesale electricity prices between Northern (SING) and Central (SIC). These prices are from noon to 1pm, but the paper also examines prices at other hours of the day.

Before integration, there were large price differences between regions. Between 2013 and 2015, prices were typically much lower in Northern Chile, with average differences often exceeding $100 per megawatt hour. Then, between 2016 and 2017, the supply-demand balance flipped, with consistently higher prices in Northern Chile. The paper provides additional details about the flip, but the main explanation is large growth in solar capacity just to the south of the interconnection in SIC. But the important broader point is that during the years that the regions were not connected, prices tended to be quite different.

After integration, the price differences go to nearly zero. Week-after-week, electricity was shipped along the new transmission line to whichever location had the highest value for it. This is how free trade works. When I have excess, I sell to you. When you have excess, you sell to me. This is market efficiency! Smaller price differences mean this integrated market is finding lower cost ways to meet demand.

Locational Patterns

The locational patterns are interesting too. The maps below plot province-level average electricity prices between noon and 1pm for three time periods. Before interconnection, prices were low in the middle, medium in the North, and high in the South. Interconnection significantly equalized prices above 30 degrees latitude, but it was not until reinforcement in 2019 that price uniformity more or less held for the entire country.

When the area around Santiago and Concepción goes from red to green, this is Northern solar generation finally being able to reach these important load centers. This means lower electricity bills for residential and non-residential customers, and less need to operate fossil-fuel powered generation. Indeed, the authors show that along with price convergence, market integration led to higher levels of renewable generation, decreases in generation cost, and lower pollution emissions. Win-win-win!

I can’t help but to contrast this with Texas during February 2021. Grumpy economists have often argued that Texas could have a more reliable, cheaper, and greener electricity market if it would integrate with the rest of the United States. Just look at the Texas Power Crisis. At the same time that electricity prices in Texas were spiking to $9000 per MWh and millions of households were experiencing blackouts, wholesale prices in MISO and PJM were 20x lower. If Texas could have imported electricity from other states, you would not have seen these huge price differentials.

Longer-Run Impacts

Chile’s transmission investments were planned years in advance, and the authors find that renewables developers anticipated the integrated market and began increasing investment even before the transmission expansions occurred.

Estimating impacts on these investment margins is a big part of the contribution of their paper, and the authors build a structural model of power plant entry that allows them to say what the Chilean market would have looked like without these transmission investments. They find, for example, that the full dynamic impact was to increase total Chilean solar capacity by 51%. As the authors explain, “a substantial amount of renewable entry would not have occurred in the absence of market integration”.

Total Installed Solar Capacity in Chile

This study was made possible, in part, because of the availability of unusually rich data. Chile has long been committed to collecting and sharing detailed data about their electricity market. The authors were able to collect, for example, detailed hourly data on node-level market clearing prices. This type of detailed information enables innovative research and a better understanding of the market.

Integration = Value

The paper complements a broader growing literature on the importance of electricity transmission. In related work, for example, economists Harrison Fell, Dan Kaffine, and Kevin Novan examine transmission congestion in ERCOT and MISO, finding large environmental benefits from increased transmission.

The big takeaway from this growing literature is that transmission expansions can create significant economic value. Yes, electricity transmission is expensive and challenging to build. But these estimates of economic and environmental benefits can be compared to investment costs to help guide when and where to build new transmission.

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Suggested citation: Davis, Lucas. “Market Integration and Renewable Energy” Energy Institute Blog, UC Berkeley, July 11, 2022, https://energyathaas.wordpress.com/2022/07/11/market-integration-and-renewable-energy/