Chile's solar revolution
How wholesale electricity prices fell with solar power
Can a country can transition to renewables and reduce prices in just a couple of years? The answer is yes. Chile did both. Let's explore how.
In 2017, Chile finished building a transmission line to carry electricity generated in the Atacama desert down to the South, where major cities like Santiago are located.1
New markets for solar electricity
This transmission line induced more investment into solar power because firms could now sell their electricity to major demand centres in the South which were previously unaccessible.
A rapid solar revolution
Chile went from getting no electricity from solar power in 2012 to meeting one-fifth of its total electricity needs from solar in 2023. The greatest rise happened after the transmission line was built and at the same time, coal generation declined.1
Can you guess by how much wholesale electricity prices fell thanks to this line?
Do not scroll down until you have answered the question!
*
*
*
*
*
*
*
*
*
*
*
*
If you picked >75%, congratulations! You are correct.
Prior to the transmission line, wholesale electricity prices in the South were all in the red, touching a maximum of 233 $/MWh but once solar power could be transmitted from the Atacama desert to other parts of the country, prices started dropping down to 20-30 $/MWh, putting much of the country in shades of green and blue as can be seen in the figure below.2
Source: Gonzales, L.E., Ito, K. and Reguant, M., 2023
Why is solar so cheap?
Unlike coal or oil where you have to continually pay for fuel, sunshine is free. Moreover, the one-off costs of buying and installing solar panels has fallen dramatically.3
A pessimism bias?
When I do this poll with my students, most answer somewhere in the middle and tend to be conservative. Yet, our priors don't always match up with the data.
The key takeaways
Rapid change is possible. In just two years, prices fell substantially and solar successfully grew in capacity.
Climate action and development are not at loggerheads. Here, the integration of solar delivered immense benefits in terms of lower wholesale electricity prices.
Society has a status quo bias. People frequently under-estimate technological progress.4 We are hardwired to be conservative but the data is saying something else. How can we overcome our inherent status quo bias?
This is one of my favourite papers in Economics so if you like modelling and data, check it out.5
Solarisation further afield
Finally, this isn’t just a South America story. In one of my future posts, I will talk about Namibia’s solar revolution or Pakistan's accidental rise to the 6th largest solar market in the world.
Subscribe to stay tuned.
IEA 2023. Electricity in Chile. Data.
Gonzales, L.E., Ito, K. and Reguant, M., 2023. The investment effects of market integration: Evidence from renewable energy expansion in chile. Econometrica, 91(5), pp.1659-1693.
Way, R., Ives, M.C., Mealy, P. and Farmer, J.D., 2022. Empirically grounded technology forecasts and the energy transition. Joule, 6(9), pp.2057-2082.
Ibid.
Gonzales, L.E., Ito, K. and Reguant, M., 2023. The investment effects of market integration: Evidence from renewable energy expansion in chile. Econometrica, 91(5), pp.1659-1693.
Very interesting paper. I wonder if there’s another big lesson about how transmission investments can unlock new lower-cost sources of power? Seems like most places have a transmission bottleneck yet new lines are constrained by regulations (US) or lack of public investment (many emerging markets). Lots of experiments are trying to attract private $ into transmission but it’s not going very well. How did Chile finance that line?
For now, I imagine the coal and gas plants are sunk capital and are not factored into electricity pricing. When the wind and sun are not available these fossil-fuelled generating plants can be used. The result is reliable electricity.
What this would look like would be a reduction in coal and gas use, and a drop in the cost of electricity.
The total cost of the system, for reliability, is the cost of the solar panels, the cost of the wind farms and the cost of the coal and gas plants.