Contents lists available at ScienceDirect Energy Policy journal homepage: www.elsevier.com/locate/enpol A surplus based framework for cross-border electricity trade in South America Claudio A. Agostini a, ⁎ , Andrés M. Guzmán b , Shahriyar Nasirov c , Carlos Silva c a School of Government, Universidad Adolfo Ibáñez, Chile b National Electric Coordinator, Santiago, Chile c Science and Engineering Faculty, Universidad Adolfo Ibáñez, Chile ARTICLE INFO JEL: Q40 Q48 O54 D47 Keywords: Electricity regulation Import/export of electricity South America Chile ABSTRACT The South American region has experienced a steady increase in its demand for electricity and faces several challenges in the development of the electricity sector. Among them, high fluctuations in hydro generation, high and volatile prices of fossil fuels, and environmental and social impacts associated to energy activities. Strengthening cooperation for cross-border electricity trade is considered a sustainable alternative for addressing these challenges. For the expansion of electricity trade among countries within the region, both infrastructure and a regulation that defines the conditions of the electric power exchanges between countries are required. A good regulatory framework would allow all market players to have access to the commercialization of energy with other countries in the region, guarantee that the treatment of exchanges is non-discriminatory, and maintain the efficiency, cost effectiveness and security characteristics operation of all electricity systems. In this context, this paper proposes a framework with the basic setting conditions for the import and export of energy from the "surplus" available for exchange. The empirical analysis of the regulatory proposal, based on simula- tions, shows that the exchange of energy from Chile with its neighboring countries is feasible in a clear and transparent manner, reducing the marginal costs of energy and the total cost of operation, keeping the average cost of generation relatively constant. 1. Introduction Over the last decade, South America has experienced a robust economic growth, mostly driven by the increase in commodity prices but also by the implementation, in most countries, of sound market- oriented policies. The economic dynamism, including a significant im- provement in the welfare of the population, has led to a double boost in electricity demand. Overall electricity consumption per capita in South America has increased at a rate of 3.3% per year, reaching, on average, 2200 kWh in 2014 (World Bank, 2016). Historically, electricity in South America has been mostly generated by large hydropower plants. In 2015, installed capacity of hydro sources accounted for 153 GW, providing about 65% of all electricity generated in the whole region (World Energy Council, 2016). Brazil leads the continent with 91.8 GW installed capacity. Argentina, Chile, Colombia, Paraguay, Venezuela and Ecuador also have a significant hydropower capacity. Peru and Bolivia, on the other hand, rely mostly on fossil fuels -oil and natural gas- for power generation. Over the past few years, the region has become highly vulnerable to climate impacts including droughts and floods. This has generated uncertainty about energy security since power generation depends significantly on hydro sources. In fact, during the last decade, the main hydro countries such as Chile, Brazil, and Colombia have experienced severe drought periods that led to blackouts leaving large urban areas without electricity (World Energy Council, 2016). Moreover, new large hydro projects have been either postponed or abandoned due to social and environmental concerns, including deforestation and displacement of communities. Although the region’s energy matrix is one of the least polluting in the world, the weight of fossil fuel energy sources has increased sub- stantially, gaining ground at the expense of hydroelectric sources. As a result, according to projection by OECD, unless current trends in the energy generation market change, greenhouse gas emissions will in- crease by 60% by 2050 (OECD, 2011). Since 2012, there has been a significant increase in investment in renewable energy in the region led by wind, mostly in Brazil and https://doi.org/10.1016/j.enpol.2019.01.053 Received 24 April 2018; Received in revised form 7 January 2019; Accepted 19 January 2019 ⁎ Corresponding author. E-mail addresses: Claudio.agostini@uai.cl (C.A. Agostini), andres.guzman@coordinadorelectrico.cl (A.M. Guzmán), shahriyar.nasirov@uai.cl (S. Nasirov), c.silva@uai.cl (C. Silva). Energy Policy 128 (2019) 673–684 Available online 01 February 2019 0301-4215/ © 2019 Elsevier Ltd. All rights reserved. T