Natural gas to complement solar intermittency: Long-run consequences of policy interventions

Natural gas has become pivotal in the energy transition, as it can complement renewable energy at a lower emission rate compared to alternative fossil fuels. In countries with scarce natural gas reserves, firms might exhibit insufficient import levels relative to governmental preferences. In this paper, we study several policies designed to incentivize larger natural gas orders and examine their impact on long-term solar entry. Our research is conducted in Chile, a notable solar energy adopter, which implemented a policy to encourage natural gas procurement. We find that while the policy displaces coal usage, it simultaneously increases natural gas imports to an extent that counterbalances its positive effects on emissions, incurring a net pollution cost of $20 million per year. Removing this policy would not only result in a short-term reduction in emissions but also stimulate increased solar energy adoption in the long run by 10%. Among the policies we examined, implementing a carbon price proves most effective, as it raises natural gas imports, lowers emissions in the short run by $191 million annually, and enhances solar energy entry in the long term by 54%.