Electricity Interconnection in Chile: prices versus costs

Having a well-adapted transmission network is key for reaching a sustainable energy system, where generators and consumers participate in an efficient market. The purpose of the present research is to estimate the impact on the final prices of the interconnection of the two largest electrical systems in Chile. To this end, an econometric model is used in which prices, among other variables, are explained by the level of marginal costs in the system (opportunity cost), the degree of concentration in the market (market power), and the variability of marginal costs projected by the agents (risk). The data corresponds to bilateral contracts between generators and major clients, from 2006 to 2014. The basic results indicate that the interconnection would benefit final customers by reducing equilibrium contract prices, as a result of the decreased variability of expected marginal costs and a lower concentration of existing generating companies. This studys main contribution is to focus on the benefits of electricity interconnection under conditions of competition and risk, instead of using the simple estimation of direct costs, as has traditionally been done