New Research from Associate Professor Koichiro Ito and Luis Gonzales, MPP’19, Suggests Grid Expansion Can Boost Renewable Energy

To keep up with the looming threats of climate change, policymakers around the globe feel the pressure to pursue meaningful and effective environmental practices. The $1 trillion infrastructure bill passed last year under President Joe Biden represents a sizable investment in those efforts, with focused funding for climate-conscious initiatives such as reducing greenhouse gas emissions and creating a clean power grid.

With renewable energy options at the forefront of the mind, Koichiro Ito, an associate professor at the University of Chicago’s Harris School of Public Policy, has co-authored a study looking into the relationship between renewable energy and power grid expansion.

Ito and his co-authors, Luis Gonzales, MPP’19, of the Pontifical Catholic University of Chile, and Mar Reguant of Northwestern University, dove into researching the impact of expanding renewable energy transmission and market integration.

“Effective and economical expansion of renewable energy is one of the most urgent and important challenges of addressing climate change,” the authors write. “Many countries consider these challenges as first-order policy questions.”

The collaboration between Ito and Gonzales began in 2018, while Gonzales was an MPP student at Harris. Working in Bolivia and Chile’s finance ministries, Gonzales developed an interest in how integrating energy markets affects price, production, and greenhouse gas emission. This drove him to apply for Harris’s MPP program.

“The main objective of attending Harris was to study with Koichiro Ito, Ryan Kellogg, and Michael Greenstone, who are among the world’s foremost leaders in research on the most important issues in climate change today,” Gonzales said.

He met Ito in one of his PhD classes where the acclaimed energy scholar was explaining his struggles with finding data to analyze market integration’s effect on renewable energy expansion. Gonzales chimed in that Chile already had done market integration with publicly available data. A collaboration was born. Soon after, Ito also invited his longtime collaborator, Mar Reguant at Northwestern University, to conduct rigorous analysis on this question.    

The authors looked at this data and Chile’s attempts at making renewable energy a realistic option for reducing emissions. Over the past several years, the country had expanded energy transmission lines, adapting them to fit the specific needs of transporting renewable energy.

The major hurdle with renewable energy arises with the logistics of transmission. Areas rich in renewable resources (such as wind and sun), by nature, tend to be largely positioned far from those centers of greatest demand: namely, large cities. The current infrastructure, designed with conventional power plants in mind, does not have the capability to effectively transmit the energy.

When all the energy harvested cannot be used up by the local community or transmitted for use in major cities, the renewable energy plants must curtail electricity generation to avoid system breakdowns. This also means that the price in renewable energy-rich areas can become incredibly low, dipping to negatives at times. With these conditions, both new entries and investments in the industry are scarce.

To address this challenge, Ito, Gonzales, and Reguant developed a model that demonstrated how market integration and transmission expansion for renewable energy can deliver more  encouraging results.  In their model, the integration of the markets in rural, renewable-rich areas and those in large, renewable-deficient cities made it possible for energy to be more effectively transmitted, maximizing the use of the energy harvested. It also leveled out the price of energy with those living close to the wind and solar farms experiencing an increase in their energy prices, with those in big cities seeing a decrease.

This model reflected what the researchers found when looking at the data from Chile. The Chilean government had connected the north, with its glut of renewable energy, and the south, with significant energy demand, in 2017. It also created an additional extension transmission line in 2019. Over time, renewable energy production increased, and the cost of generation decreased. The result of the researchers’ static model suggested that market integration increased solar generation by 17% in Chile.

They argue further that the commonly-used estimations of the effects of renewable investments are likely to miscalculate the total benefit to Chile by ignoring certain dynamic impacts, such as how the promise of market integration itself led to a rapid increase of investments and growth in the country’s renewable capacity.

In their findings, renewable capacity started growing after the first announcement of the plan for market integration, two years before the transmission line was completed. When considering both the static and dynamic effect of market integration, the researchers reveal that the full impact of market integration on solar generation was a whopping 51% increase.

In assessing the return on these investments by the Chilean government, the authors found that, when considering both static and dynamic impact as well as overall environmental benefit, the costs would be recouped in less than six years. In fact, they say their “main analysis suggests that the cost of transmission expansion can be recovered in less than 5.5 years with the discount rate at 5.83%.”

All of this research to further the understanding of renewable energy integration was made possible by the collaborations started at Harris.

“I have seen many Harris faculty members collaborate on research with students,” said Ito. “This is one of the examples in which such collaboration has created a unique opportunity for multiple new research projects.”

Gonzalez’s broad knowledge about the institutional details and data on the Chilean electricity market helped make this paper possible. He said working alongside Ito and Reguant has motivated him to continue his work learning about the challenges of implementing renewable energy on middle-income economies.

“Each day, I remember the importance of policies having evidence based on data and theory in economics, what they teach at UChicago,” he said.

The threats of climate change loom large. The authors write that the electricity sector is one of the largest contributors to global greenhouse gas emissions, and it only continues to grow. If the global community hopes to find a future safe from these environmental threats, significant action must be taken. Ito, Gonzalez, and Reguant’s paper proposes one route that holds promise, highlighting the valuable example of Chile’s success.

“Decarbonizing electricity generation is critical to addressing climate change,” they write. “Market integration not only helps renewable energy to be transmitted to demand centers but also incentivizes new entries and investment of renewables, which is a crucial market force to accelerate decarbonization.”