Electricity Interconnection with Intermittent Renewables

Yuting Yang is an Assistant Professor of Economics at the University of New Mexico, specializing in environmental and energy economics. At present, her research program is broadly focused on applied theory analysis of policy-related issues, mainly in the context of energy transition towards green and sustainable energy use. Dr.Yang received her B.A. in International Economics from Zhejiang University (China), her M.A. in Economics Development from the Vanderbilt University, and her Ph.D. in Economics from the Toulouse School of Economics (France). She has published in JEEM and received EAERE Best Doctoral Dissertation in Environmental and Resource Economics Award.

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 Pigouvian carbon price is low. Conversely, interconnection increases renewable capacity and reduces carbon emissions for a high carbon price. 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 carbon price 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 carbon tax, the interconnection may increase carbon emissions.