The Effects of Renewable Electricity Supply when Renewables Dominate: Evidence from Uruguay

Abstract

The benefits of expanding wind and solar electricity generation depend on the effect they have on the electricity production mix. Using hourly production data from Uruguay, a country which currently has 94% of its grid green, I study its electricity transition to renewables. In particular, I quantify how an increase in wind and solar production first, displaces thermal, hydro, and biomass production. Second, I analyze how this transition reduces CO2 emissions in a context of large hydro production; and third how it affects spot prices. I find that the increase in wind and solar production has several positive effects, (i) a displacement of thermal production, especially in winter; (ii) a reduction in the CO2 emissions; (iii) a spillover effect to the region due to an increase in exports to Argentina and Brazil; (iv) a decrease in spot prices caused by the shutting-off of the most (marginally) costly plants. However, the increase in wind and solar production is not enough to eradicate thermal entirely. These results show what countries can expect from increasing their production in renewables, how renewables interact with other electricity sources, and its effect on emissions, and spot prices.