Yang, Yuting (2020) Electricity Interconnection with Intermittent Renewables. TSE Working Paper, n. 20-1075, Toulouse

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Abstract

Electricity interconnection has been recognized as a way to mitigate carbon emissions by dispatching more efficient electricity production and accommodating the growing share of renewables. I analyze the impact of electricity interconnection in the presence of intermittent renewables, such as wind and solar power, on renewable capacity and carbon emissions using a two-country model. I find that in the first-best, interconnection decreases investments in renewable capacity and exacerbates carbon emissions if the social cost of carbon (SCC) is low. Conversely, interconnection increases renewable capacity and reduces carbon emissions for a high SCC. Moreover, the intermittency of renewables generates an insurance gain from interconnection, which also implies that some renewable capacity is optimally curtailed in some states of nature when the SCC is high. The curtailment rate and the corresponding carbon emissions increase for more positively correlated intermittency. I calibrate the model using data from the European Union electricity market and simulate the outcome of expanding interconnection between Germany-Poland and France-Spain. I find that given the current level of SCC, the interconnection may increase carbon emissions. The net benefit of interconnection is positive, with uneven distribution across countries.