As low-cost sources of renewable energy transform the U.S. electricity grid, the transmission grid is increasingly strained. New solar and wind generation resources are not built in areas of high demand. Better geographic integration would result in system-wide cost savings, according to new findings from energy economist Catherine Hausman, but would also create winners and losers among generation companies who have the power to delay or block projects that are not in their private economic interest.
Hausman’s working paper, “Power Flows, Part 2: Transmission Lowers US Generation Costs, but Generator Incentives are not Aligned,” was written in collaboration with Owen Kay, a PhD candidate at the Ford School’s economics and public policy program, and Dasom Ham, a PhD student at the University of Michigan’s College of Literature, Science, and the Arts Department of Economics.
The study documents widespread transmission constraints across the country. They find that local supply responds to changes in local rather than market-wide demand, impling that operators cannot use the grid cost-effectively—they are unable to dispatch low-cost units to meet faraway demand.
Expanding on previous findings, Hausman and her colleagues estimated the excess generation costs associated with transmission congestion and other spatial constraints in the lower 48 states. The researchers found the potential generation cost savings totaled $5.8 to $7.1 billion in 2022 and $3.4-$5.0 billion in 2023 due to greater use of low-cost resources like wind and solar, as well as more fuel-efficient conventional generators. Better market integration would supply total demand more cheaply and reliably, lowering costs for consumers and benefiting the U.S. economy, they note. As the transmission system is built out, it could create large gains from trade.
However, this same geographic integration will create strong incentives for some generation companies—incumbents in high-cost markets—to block these efforts for their own personal gain.
By analyzing power plant revenues, they find clear geographic patterns: producers in the Great Lakes and Great Planes would see significant revenue increase while those in the Northeast, Southeast, and California would see lower revenues. This change is driven by the abundant wind energy in the Midwest and Great Plains that cannot reach demand centers like East Coast cities. Eliminating regional constraints would raise prices in exporting regions and lower them in importing ones, benefitting exporters in the former and hurting producers in the latter.
Existing generation companies hold considerable influence in regional transmission organizations, the researchers explain, often outweighing the voices of consumers and potential new generators. Many of these companies are the same ones that would lose profits under a more integrated market, giving them an incentive to delay or block long-distance transmission projects.
Hausman and her colleagues conclude that policymakers must account for these conflicting producer and consumer incentives when proposing reforms to the U.S. transmission network.
>>Read “Power Flows, Part 2: Transmission Lowers US Generation Costs, but Generator Incentives are not Aligned” published by Resources for the Future
>>Read the related NBER Working Paper, “Power Flows: Transmission Lines, Allocative Efficiency, and Corporate Profits”
