Working Paper: NBER ID: w30016
Authors: Luis E. Gonzales; Koichiro Ito; Mar Reguant
Abstract: Effective and economical expansion of renewable energy is one of the most urgent and important challenges of addressing climate change. However, many countries are facing a problem because existing network infrastructures (i.e., transmission networks) were not originally built to accommodate renewables, which creates disconnections between demand centers and renewable supply. In this paper, we study the static and dynamic impacts of market integration on renewable energy expansion. Our theory highlights that statically, market integration improves allocative efficiency by gains from trade, and dynamically, it incentivizes new entry of renewable power plants. Using two recent grid expansions in the Chilean electricity market, we empirically test our theoretical predictions and show that commonly-used event study estimation underestimates the dynamic benefits if renewable investments occur in anticipation of market integration. We build a structural model of power plant entry and show how to correct for such bias. We find that market integration resulted in price convergence across regions, increases in renewable generation, and decreases in generation cost and pollution emissions. Furthermore, a substantial amount of renewable entry would not have occurred in the absence of market integration. We show that ignoring this dynamic effect would substantially understate the benefits of transmission investments.
Keywords: Market Integration; Renewable Energy; Electricity Markets; Chile; Environmental Economics
JEL Codes: L94; L97; Q41; Q42; Q53; Q56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market integration (F15) | price convergence (D41) |
| price convergence (D41) | renewable generation (Q42) |
| price convergence (D41) | costs (J30) |
| Market integration (F15) | renewable generation (Q42) |
| Market integration (F15) | costs (J30) |
| Market integration (F15) | pollution emissions (Q53) |
| Market integration (F15) | renewable entry (Q20) |
| Market integration (F15) | investment decisions (G11) |