Power Flows, Part 2: Transmission Lowers US Generation Costs, But Generator Incentives Are Not Aligned
This paper analyzes the challenges in the US process for siting and building new transmission lines, highlighting the potential for significant generation cost savings from regional integration.
Abstract
The US electrical grid is experiencing a rapid transition as cheap renewable electricity transforms the energy mix. With these grid changes, new supply is not spatially matched to demand, and the transmission network has become more strained. Better market integration could thus lower US generation costs. This report estimates the excess generation costs associated with transmission congestion and other spatial constraints across the lower 48 states, as an extension of a 2024 report on the MISO/SPP regions. We document that eliminating interregional constraints would have reduced generation costs by $5.8–7.1 billion in 2022 and $3.4–5.0 billion in 2023. Despite these overall potential cost savings, we show that market integration creates winners and losers among generation companies—of interest because generators have a large say in whether transmission projects are developed. We show clear spatial patterns in generation company outcomes, documenting that producers in some regions have incentives to delay or block grid integration despite the overall system benefits.
Keywords: Electricity markets, transmission constraints, renewable energy, market integration, political economy of energy markets, energy transition
JEL Codes: L94, P18, Q41, Q42, Q48
