The Dynamic Impact of Market Integration: Evidence from Renewable Energy Expansion in Chile

63 Pages Posted: 19 May 2022

See all articles by Luis Gonzales

Luis Gonzales

Pontificia Universidad Católica de Chile

Koichiro Ito

University of Chicago

Mar Reguant

Northwestern University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 19, 2022

Abstract

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.

Suggested Citation

Gonzales, Luis and Ito, Koichiro and Reguant, Mar, The Dynamic Impact of Market Integration: Evidence from Renewable Energy Expansion in Chile (May 19, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-62, Available at SSRN: https://ssrn.com/abstract=4114377 or http://dx.doi.org/10.2139/ssrn.4114377

Luis Gonzales

Pontificia Universidad Católica de Chile ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, Región Metropolitana 8331150
Chile

Koichiro Ito (Contact Author)

University of Chicago

1101 East 58th Street
Chicago, IL 60637
United States

Mar Reguant

Northwestern University - Department of Economics ( email )

2001 Sheridan Rd
Evanston, IL 60208
United States

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