Electricity interconnection with intermittent renewables

Electricity interconnection has been recognized as a way to mitigate carbon emissions by dispatching more efficient electricity production and accommodating the growing integration of renewables. I analyze the impact of electricity interconnection in the presence of intermittent renewables, such as wind and solar power, on the equilibrium energy mix and carbon emissions under a Pigouvian carbon price using a two-country model. I find that interconnection decreases investments in renewable capacity and exacerbates carbon emissions if the carbon price is low. Conversely, interconnection increases renewable capacity and reduces carbon emissions for a high carbon price. Moreover, I identify the insurance benefit of increased interconnection and how it depends on the correlation of renewables in the two countries. I calibrate the model using data from the European Union electricity market and simulate expanding interconnection between Germany–Poland and France–Spain. The simulation shows that achieving the EU2030 interconnection target increases total carbon emissions at a carbon price of 100€/tCO2.