High energy costs in insular energy systems and the potential for integrating innovative renewable solutions: The case of Chile

Abstract

Insular energy systems are critical for efficient energy transition due to their geographic and structural characteristics and their reliance on fossil fuels. The literature indicates that renewable energy can mitigate high operating costs and fossil fuel dependence. However, insular systems in developing countries face specific political, technical, and economic challenges that require further study. The novelty of this study lies in its holistic analysis of Chilean insular energy systems, offering a comprehensive perspective often lacking in research focused on developed countries. Renewable energy penetration in isolated systems remains significantly lower than on the mainland, largely due to market distortions from fossil fuel subsidies. In Magallanes, where gas turbines benefit from government support, renewable integration is below 10 %, while subsidized gas generation maintains a Levelized Cost of Energy (LCOE) of 219 USD/MWh, preserving its advantage over renewables. To address this barrier, policy recommendations include reallocating subsidies, implementing alternative business models, and adopting long-run incremental cost (LRIC) pricing. This study highlights that, although renewable energy can lower operating costs, integration barriers remain the main challenge. The findings provide valuable insights for policymakers, researchers, and investors interested in the feasibility of renewable generation in island systems.