Electricity interconnection with intermittent renewables

Electricity interconnection has been recognized as a way to mitigate carbon emissions by dispatching more efficient electricity production and accommodating the growing integration of renewables. I analyze the impact of electricity interconnection in the presence of intermittent renewables, such as wind and solar power, on the equilibrium energy mix and carbon emissions under a Pigouvian carbon price using a two-country model. I find that interconnection decreases investments in renewable capacity and exacerbates carbon emissions if the carbon price is low. Conversely, interconnection increases renewable capacity and reduces carbon emissions for a high carbon price. Moreover, I identify the insurance benefit of increased interconnection and how it depends on the correlation of renewables in the two countries. I calibrate the model using data from the European Union electricity market and simulate expanding interconnection between Germany-Poland and France-Spain. The simulation shows that achieving the EU2030 interconnection target increases total carbon emissions at a carbon price of 100 euro /tCO(2).

Automated summary

Electricity interconnection is seen as a way to reduce carbon emissions, but its impact on investment in renewable energy and carbon emissions depends on the carbon price.