Analysis of generation investments under price controls in cross-border trade of electricity

Juan C. Muñoz, Enzo Sauma, Francisco D. Muñoz and Rodrigo Moreno

Energy Economics, 2023, vol. 123, issue C

Abstract: Price controls are commonly employed in Latin America and other regions to prevent price increases in exporting regions during cross-border trade of electricity. This paper introduces a methodology to evaluate the economic impact of price controls on generation investments, dispatch decisions, and carbon emissions in the context of cross-border electricity trade. We propose a non-linear adjusting function to represent a price-control rule, which can be incorporated into equilibrium models for generation firms and price-sensitive consumers. By employing fixed-point iterations between the adjusting function and an optimization problem that determines equilibrium investments and dispatch decisions for generation firms in a competitive environment, we obtain an equilibrium solution. We apply the proposed methodology to analyze the current price controls governing cross-border electricity trade between Chile and Argentina, with a focus on the exporting country. Our findings reveal that existing price controls can impede incentives for renewable energy investments, particularly in wind and solar, while stimulating investments in fossil fuel-based generation capacity. Moreover, these controls lead to increased CO2 emissions compared to a scenario without price controls. Additionally, we observe that the inefficiency resulting from price controls is proportionate to the volume of exports relative to local demand and the price elasticity of demand in the importing region.

Keywords: International energy trade; Price controls; Renewable investments; Market equilibria; Gauss–Seidel method (search for similar items in EconPapers)
JEL-codes: C61 D43 L22 L51 L94 Q41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:123:y:2023:i:c:s0140988323002207

DOI: 10.1016/j.eneco.2023.106722

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