Renewable Power Trades and Network Congestion Externalities

TL;DR

This paper analyzes how increased renewable energy integration causes non-intuitive grid congestion externalities, highlighting the need for coordinated infrastructure investments and potential financing solutions like power transit fares.

Contribution

It derives conditions for negative network externalities from renewable power trades and demonstrates the importance of coordinated infrastructure investments across regions.

Findings

Each additional unit of power traded reduces transmission capacity by 27%.

Externalities require coordinated infrastructure investments across regions.

Power transit fares can finance infrastructure investments to mitigate externalities.

Abstract

Integrating renewable energy production into the electricity grid is an important policy goal to address climate change. However, such an integration faces economic and technological challenges. As power generation by renewable sources increases, power transmission patterns over the electric grid change. Due to physical laws, these new transmission patterns lead to non-intuitive grid congestion externalities. We derive the conditions under which negative network externalities due to power trades occur. Calibration using a stylized framework and data from Europe shows that each additional unit of power traded between northern and western Europe reduces transmission capacity for the southern and eastern regions by 27% per unit traded. Such externalities suggest that new investments in the electric grid infrastructure cannot be made piecemeal. In our example, power infrastructure investment in northern and western Europe needs an accompanying investment in southern and eastern Europe as well. An economic challenge is regions facing externalities do not always have the financial ability to invest in infrastructure. Power transit fares can help finance power infrastructure investment in regions facing network congestion externalities. The resulting investment in the overall electricity grid facilitates integration of renewable energy production.