Elsevier

Energy Policy

Volume 128, May 2019, Pages 673-684
Energy Policy

A surplus based framework for cross-border electricity trade in South America

https://doi.org/10.1016/j.enpol.2019.01.053Get rights and content

Highlights

  • South America faces several challenges in the development of the electricity sector.

  • Cross-border energy trade could be a sustainable alternative for addressing energy challenges.

  • A Regulatory proposal for the treatment of short-term power exchanges in South America.

  • Regional trade could reduce the marginal costs in each country and the total cost of operation.

Abstract

The South American region has experienced a steady increase in its demand for electricity and faces several challenges in the development of the electricity sector. Among them, high fluctuations in hydro generation, high and volatile prices of fossil fuels, and environmental and social impacts associated to energy activities. Strengthening cooperation for cross-border electricity trade is considered a sustainable alternative for addressing these challenges. For the expansion of electricity trade among countries within the region, both infrastructure and a regulation that defines the conditions of the electric power exchanges between countries are required. A good regulatory framework would allow all market players to have access to the commercialization of energy with other countries in the region, guarantee that the treatment of exchanges is non-discriminatory, and maintain the efficiency, cost effectiveness and security characteristics operation of all electricity systems. In this context, this paper proposes a framework with the basic setting conditions for the import and export of energy from the "surplus" available for exchange. The empirical analysis of the regulatory proposal, based on simulations, shows that the exchange of energy from Chile with its neighboring countries is feasible in a clear and transparent manner, reducing the marginal costs of energy and the total cost of operation, keeping the average cost of generation relatively constant.

Introduction

Over the last decade, South America has experienced a robust economic growth, mostly driven by the increase in commodity prices but also by the implementation, in most countries, of sound market-oriented policies. The economic dynamism, including a significant improvement in the welfare of the population, has led to a double boost in electricity demand. Overall electricity consumption per capita in South America has increased at a rate of 3.3% per year, reaching, on average, 2200 kWh in 2014 (World Bank, 2016).

Historically, electricity in South America has been mostly generated by large hydropower plants. In 2015, installed capacity of hydro sources accounted for 153 GW, providing about 65% of all electricity generated in the whole region (World Energy Council, 2016). Brazil leads the continent with 91.8 GW installed capacity. Argentina, Chile, Colombia, Paraguay, Venezuela and Ecuador also have a significant hydropower capacity. Peru and Bolivia, on the other hand, rely mostly on fossil fuels -oil and natural gas- for power generation.

Over the past few years, the region has become highly vulnerable to climate impacts including droughts and floods. This has generated uncertainty about energy security since power generation depends significantly on hydro sources. In fact, during the last decade, the main hydro countries such as Chile, Brazil, and Colombia have experienced severe drought periods that led to blackouts leaving large urban areas without electricity (World Energy Council, 2016). Moreover, new large hydro projects have been either postponed or abandoned due to social and environmental concerns, including deforestation and displacement of communities.

Although the region’s energy matrix is one of the least polluting in the world, the weight of fossil fuel energy sources has increased substantially, gaining ground at the expense of hydroelectric sources. As a result, according to projection by OECD, unless current trends in the energy generation market change, greenhouse gas emissions will increase by 60% by 2050 (OECD, 2011).

Since 2012, there has been a significant increase in investment in renewable energy in the region led by wind, mostly in Brazil and Uruguay, and solar PV, mostly in Chile and Brazil (IRENA, 2016).

Growing energy demand, growing risk of stable hydropower generation, and growing emission concerns have put significant pressure on the region countries to start considering alternative ways for dealing with these energy challenges. Cross-border electricity trade could be a cost-effective alternative in that regards and should be seriously considered and evaluated as a viable option.

Increasing evidence from different parts of the world -including Northern Europe, United States, Western and Southern Africa, and South Asia- robustly show the benefits of interconnections between large electrical systems. For example, the empirical evidence from cross-border energy trade in North America among the U.S., Canada and Mexico show that cross border -interconnections have generated technical and economic benefits (Parfomak et al., 2017). However, these experiences also show that interconnections need to deal with various challengers, such as the financing of tie lines and dealing with the systems both sides of the interconnection (Bushnell, 1999, Joskow and Tirole, 2000, Crampes and Laffont, 2001).

Similarly, the European system under the support of the ENTSO-E, has shown that the interconnected operation of the electrical networks of large local systems brings significant benefits, not only in relation to the reliability of the operation and use of natural resources available in the region, but also from the point of view of economic efficiency (Baritaud and Volk, 2014). Some estimations show that the electricity system interconnection in Europe could increase the efficiency of trading day-ahead, intra-day and balancing services across borders providing a total of 3.4 billion euro per year in the short run (Newbery, 2016).

Several studies for South Asian countries have also shown that the expansion of cross- border electricity trade would provide great technical, economic, environmental, and reliability benefits (Saroha and Verma, 2013, Chattopadhyay and Fernando, 2011). For example, for the Greater Mekong Subregion in Southeast Asia there are estimations showing that regional cooperation could reduce energy costs by nearly 20%, implying savings of $200 billion during the 2005–2025 period (Asian Development Bank ADB, 2012).

In the case of South America, although there are no experiences of regional interconnection, the studies developed by the UNDP (2009), Sauma et al. (2011), the IDB (2013) and the Dos-USA (2015), based on annual simulations of demand blocks and calculating the Net Present Value, show positive results for multiple interconnection alternatives between countries of the region. These evaluations show positive results not only from an economic point of view, but also regarding the efficient use of the territory and the reduction of emissions as a result of the optimization of the non-conventional renewable resources available in the region and operational safety provided by global backups against extreme contingencies at local levels or natural catastrophes.

One potential concern with energy trade is the threat to energy security for the importing countries. The use of electricity exports as “energy weapon” is an extortion risk potentially faced by countries importing electricity from countries with bargaining power over them. As in the case of solar power imports to Europe from the deserts of North Africa (Lilliestam and Ellenbeck, 2011), this risk is very low in the case of South America and even less among Chile, Peru, and Argentina, which are the countries considered in the simulations.

However, the approval of the necessary reforms to design and implement large scale electricity trade among South American countries could take a long time. There are several political constraints and lack of confidence in the reliability of some countries in terms of respecting contracts that currently prevent a major reform to implement a large-scale solution like the one in Europe, for example. For this reason, the goal of this paper is to explore the possibilities of a small-scale solution that does not require a major reform in any country and that can become a first step toward the future creation of a major coordinated energy market in South America.

In this context, this paper presents a feasible proposal for the treatment of short-term electricity exchanges between countries in South America considering existing transmission lines. For this purpose, contrary to previous regional studies, the exchange of energy between Chile and its neighboring countries is simulated on an hourly daily basis using real data from the operation of the electric system. In particular, simulations include the treatment of the unit commitment and economic dispatch during the actual operation, the treatment of the remuneration of the transmission systems by the exported and imported energy together with the management of congestion rents or tariff revenues produced in the interconnection lines and the treatment of energy transit between countries as a result of the existence of large interconnected networks (markets).

In summary, this study proposes a first basic framework to regulate the interconnections between Chile and Argentina, and, Chile and Peru, as a very first step of energy integration. The goal is then to just efficiently use the existing energy generation capacity between Chile and its two neighboring countries. In this sense, exchanges respond to opportunity only and do not make the system security dependent on other countries. In addition, it is not necessary to invest in infrastructure to implement the electricity trade, as the transmission line already exists. The proposal we simulate can be implemented in a short period of time and the realization of the potential trade gains for all the countries involved can then trigger in the future the implementation of a larger market that requires new investments in transmission and a more complex regulatory framework.

The remainder of the paper is organized as follows. Section 2 presents a short status of cross- border electricity trade in South America. Section 3 proposes a regulatory framework for treatment of cross- border electricity trade between Chile and its neighboring countries. Section 4 discusses our methodology and sources of data. Section 5 discusses the results obtained from simulations. Section 6 presents conclusions.

Section snippets

Cross-border electricity trade in South America

Globally, the international trade of electricity is about 3% of the total production. A small figure compared to 64% for oil, 31% for gas, and 16% for coal (Oseni and Pollitt, 2014). In the case of South America, cross-border electricity trade is just 2% of its total production. There are only two geographic areas where this occurs actively. One is the northern part of the subcontinent, which includes Colombia, Ecuador, and Venezuela, and the other is in the southern part and involves Brazil,

A framework for cross- border electricity trade

Materializing a regional interconnection is a complex task in multiple dimensions. On the one hand, the construction of physical links between the systems to be interconnected is necessary, which, beyond the investment necessary to cover the costs of capital and operation, usually faces political, institutional, planning and user rights barriers that hinder its implementation. On the other hand, it is necessary to establish a regulatory mechanism that allows an efficient planning of the

Energy exchange simulation methodology

For the simulation of the regulatory proposal, the monthly operation is considered using the same rules already existing in the Chilean market, simulated using a Plexos unit commitment software from EnergyExemplar, and the proposed regulatory framework for export and import. This software is widely applied in the simulations of unit commitment and economic dispatch problems (e.g., Bloom et al., 2016; Brinkman et al., 2010; Martinez-Anido et al., 2016; Novacheck and Johnson, 2017).

The objective

Results

To analyze the effects of the regulatory proposal empirically, a first energy import scenario of 150 MW is defined from Peru, a second energy export scenario of 150 MW to Argentina and a third scenario in which both previous scenarios occur simultaneously. These scenarios are then simulated considering an average day of real operation of the Interconnected System of the Great North (SING) in Chile.

Import simulations from Peru consider that Chile has low production costs during the day hours due

Conclusions

Currently, the regulation in most countries in South America does not consider the existence of regional electricity markets or the possibility of exchanges with neighboring countries, either through mechanisms to optimize available resources in the short term or through long-term supply contracts. The lack of a regulatory framework for the treatment of imports and exports of electricity prevents the integration of large electricity grids and is a growing concern in South America. In

Acknowledgements

This work was supported by the research grants CONICYT/FONDAP/15110019 (SERC-CHILE) and CONICYT/FONDECYT/11170424.

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