Electricity Market Coupling: Latin America vs. Europe

Electricity Market Coupling is spreading all around the world; however, its potential benefits and drawbacks are still open to debate, and regions like the European Union advance quite slowly towards integration. There is no agreement in terms of what are the right policies to implement in order to acquire the benefits of integration without putting reliability at risk, and most countries continue to implement national policies without taking the interconnectors into account. In order to contribute to the discussion, we develop a System Dynamics model that allows us to simulate the integration of two countries and test different policies. Two dissimilar cases, one in Latin America and one in Europe, are analyzed, and we obtain some insights into the aspects that deserve special attention when designing policies for interconnected countries. Results of the simulation show that, in the long-term, the amount of investment in generation capacity, as well as the technology mix of new investments, is influenced by the degree of interconnection. Furthermore, the effect of a capacity payment mechanism depends not only on the degree of interconnection, but also on the characteristics of the integrated countries, such as the complementarities, currently installed capacity, resources, load curves, etc.