Study: Transmission lowers US generation costs, but generator incentives are not aligned
Renewable energies are lowering electricity costs in some parts of the country, but those benefits aren't being seen by consumers everywhere because they're typically placed far away from demand centers.
Better integrating electricity transmission networks across regions could significantly reduce generation costs, new research from the University of Michigan shows-at the expense of generation companies' profits.
Economist Catherine Hausman, associate professor at the Ford School of Public Policy, and colleagues found improving interregional connectivity could have saved anywhere from $5.8 billion to $7.1 billion in electricity generation costs in 2022, and $3.4 billion to $5 billion in 2023.
At the same time, investing in regional connectivity could cost some power plants over $20 million in annual net revenue-giving them financial incentives to block or delay transmission network improvements.
"I was really struck by how the same parts of the country that have seen the biggest jumps in electricity prices-the coasts, especially the Northeast-are the parts of the country that would most benefit from long-distance transmission, according to our model," Hausman said.
She notes we must look to the past to understand why we have the transmission grid we have.
"It was built up at a time when vertically integrated companies served local demand centers, largely with nearby power plants and fairly short-distance transmission lines," Hausman said. "That's not well-matched to today's world, in which very cheap, very green power is being produced in the middle of the United States, keeping prices and greenhouse gas emissions down. At the same time, prices are spiking on the coasts.
"It would be great to transport more of that wind power to the East Coast, but that will require more long-distance lines, crossing multiple states."
The study, recently published in Proceedings of the National Academy of Sciences, gives policymakers a better understanding of why electric companies across the country may be hesitant to embrace regional integration despite associated generation cost reductions. Hausman hopes policymakers can find smart ways to accelerate long-distance transmission build-out to leverage low-cost resources like solar and wind farms.
"Power producers in the Great Lakes and Great Plains states would see significant revenue increases from increased market integration, and those in the Northeast, Southeast and California would see lower revenues," Hausman said. "As analysts and policymakers propose reforms, it will be important to consider the incentives of suppliers and therefore the critical role of grid governance."
Hausman's co-authors were Owen Kay, a U-M alumnus and research economist at the Dallas Federal Reserve, and Dasom Ham, a doctoral student at U-M's Department of Economics.
Written by Margaret Peterman, Ford School of Public Policy, and Jeff Karoub, Michigan News
