Economy-wide decarbonization requires large-scale decarbonization of the electricity sector. Hence, large-scale advance planning to expand transmission capacity and boost renewable power sources may be needed. But let’s look at trade-offs to be navigated.
Radically reducing carbon dioxide emissions is imperative for limiting future harms from global warming. Global decarbonization will require a rapid and vast expansion of solar power and wind power. Since solar and wind power generators have to be built where the sun shines and the wind blows, building up renewable energy resources will necessitate an equally rapid and vast expansion of transmission lines to bring this electricity to the places where people use it.
To address this need for expansion, regulators and many decarbonization advocates have proposed replacing the currently incremental, request-based method with a different process for expanding transmission through large-scale, long-term planning. The potential downside is that this kind of planning could adversely affect competition in electricity generation. The benefits of that competition—namely, cost-based pricing and fostering entrepreneurship through independent choices—have justified policies for more than three decades that bring competition to wholesale generation. Proposals to introduce collective planning may sacrifice these benefits that competition brings. Large-scale, long-term transmission planning can come with trade-offs.
The costs of limiting competition among power generators may be mitigated within the transmission-planning policy itself. For instance, long-term planning should be flexible enough to vary plans as market conditions warrant. Public research funding may be needed to make up for any attenuated incentives. Decisionmakers must recognize that the longer the planning horizon, the more likely are expensive and politically controversial mistakes. And ensuring buy-in from all affected parties may require effective carbon pricing, so the monetized benefits of decarbonization can cover the costs of expanding transmission.
Why Might Policy Intervention Be Necessary?
Simple economics suggests that new transmission lines presumably would be built if the benefits of adding a line or expanding the capacity of current lines exceed the costs of doing so. If such lines are not being built, then something must be standing in the way.
A first step in understanding the need for transmission policies and how to design them is to see if the historical record supports claims that something prevented the construction of beneficial lines. In its justification for Order 1000 in 2011, the most recent major prior foray into investment policy for national transmission, the Federal Energy Regulatory Commission (FERC) found that “the narrow focus of current planning requirements and shortcomings of current cost-allocation practices create an environment that fails to promote the more efficient and cost-effective development of new transmission facilities,” a claim much like the arguments made today in favor of proactive national transmission planning.
Credit: Mark Van Scyoc / Shutterstock
At that time, FERC did not provide much of a record of failure. The agency included no examples of transmission lines for which the expected benefit exceeded the expected cost but were not built. FERC gave no examples of lines that were thwarted by failures of planning, lack of information sharing, or inability to allocate costs on the basis of benefits, even stating that “the remedy we adopt is justified sufficiently by the ‘theoretical threat’ identified herein, even without ‘record evidence of abuse.’” More recently, a 2020 US Department of Energy study of transmission congestion reported that transmission investment in the part of the continental United States that’s under FERC jurisdiction (roughly, everything but Texas) was about six times greater in 2018 than 20 years earlier.
The functional separation of electricity transmission from electricity generation, which FERC had adopted to promote competition, may make it harder to coordinate the expansion of both. If little growth in demand were expected for the future, this need for coordination may not have been consequential. However, because of the ambitious goals for decarbonization that have been set for midcentury, the large-scale construction of new wind and solar generators will require an expansion of the transmission grid. But what are the downsides to long-term planning as an approach to meeting those goals?
Conflicts with Competition
The degree of transmission planning that’s envisioned by many as necessary to decarbonize the US economy poses challenges to the decades-long effort to expand the scope of competition in the electricity sector.
For over 25 years, a primary objective of national energy policy has been to promote competition among power generators, largely by inhibiting their control of access to the transmission lines that are necessary for competition. The recent proposals for collectively planning future transmission are in tension with this view. To put it bluntly: in other settings, sellers that share plans for future electricity capacity and output likely would count as committing an antitrust violation.
However, competition manifests in other ways and hence poses another source of tension with long-term transmission planning. Competition rewards entrepreneurs for finding and acting on private information to discover new markets, reduce costs, and deploy innovative technologies. In that conception, the opposite of competition is not monopoly; monopolists also can discover these rewards. Rather, the opposite is collective planning, which attenuates or removes the ability and incentive to exploit private information to pursue new technologies and market opportunities.
Decarbonization may drive new electricity transmission, but until public policy to mitigate climate change becomes much firmer, decarbonization goals introduce policy risks that may keep new transmission lines from being built.
For all its defects, the current incremental process of obtaining transmission capacity has the virtue of allowing transmission lines to adapt to new developments in the market. This evolution of the market can include differential rates of technological change that increase the relative advantages of solar generation, wind generation, carbon capture and storage, and energy efficiency. Climate change itself may affect relevant costs, such as fire-related risks. Climate change mitigation or adaptation policies can make previously unprofitable transmission lines profitable, and increased energy efficiency at the consumer end could have the reverse effect. Broad-scale planning may preclude the evolution of market responses that may, and to some extent hopefully will be, likely as we learn more about how best to undertake massive decarbonization of the US economy.
Policy Responses
If the United States ends up implementing long-term, anticipatory transmission planning, some particular policy responses may be helpful, each of which we can discuss in turn below.
Antitrust immunity
Antitrust enforcement may discourage information sharing and output commitments by competitors. Explicit statutory immunity may be warranted.
Innovation support
Loss of opportunities to profit from independent entrepreneurial initiatives reduces the incentives to innovate. Policy options can compensate for these reduced incentives by increasing public funding of research and development in non-emitting electricity generation, carbon capture and storage, improved batteries, and other technologies.
Limit the planning horizon
The longer the time horizon, the more information may be lost that otherwise might have accrued after plans are put in place. To reduce these costs, regulators can consider reducing the planning horizon, for instance by allowing the review of original plans and the implementation of revised plans over shorter periods.
Allow independent variation
Policies may be able to include a process by which power generators that perceive new market opportunities remain able to exploit those opportunities by requesting transmission lines outside the long-term planning process.
Accept inevitable error
Mistakes are likely with long-term planning that does not allow the use of private information as it may develop over time. Technological change in electricity generation, for example, may mean that transmission lines that were planned at one time turn out to be used much less than envisioned, especially lines that connect to locations outside of any loops that would carry electricity between other locations. If estimates are correct that, over the next several decades, the United States might spend upwards of a trillion dollars on increased transmission capacity, then getting that investment 90 percent right still would mean that $100 billion is spent on lines that look wasted in hindsight. Everyone involved should expect such errors and be prepared to justify their costs (borne inevitably by ratepayers or taxpayers) by citing the overall benefits of collective planning.
We Still Need Carbon Pricing
Demand for renewable electricity generation, and thus the planned construction of transmission lines to serve that demand, depends on the fossil fuel alternatives becoming relatively more expensive, be they natural gas generators or internal combustion–powered automobiles. Decarbonization may drive new electricity transmission, but until public policy to mitigate climate change becomes much firmer, decarbonization goals introduce policy risks that may keep new transmission lines from being built which otherwise would be profitable, were the country committed to reducing carbon emissions.
Making carbon pricing explicit is important to facilitate cooperation across all parties that may be affected by a planned expansion of the transmission system. Sufficiently wide public acceptance of an expansion will require that costs which are allocated to a particular state or region are sufficiently below the benefits that expanded transmission will bring to that area. National or global benefits from decarbonization do not accrue to the residents of states along a transmission route; rather, the benefits accrue elsewhere in the country and around the globe. The failure to implement a price on carbon precludes a bargain in which those who view a transmission line as costly can be compensated solely out of the benefits that accrue to residents who would benefit from increased access to renewable power. Renewable energy sources need to be able to charge a price that reflects their competitive advantage over fossil fuel generators, which would have to pay this carbon cost. Carbon pricing provides the appropriate incentives to build renewable energy resources, pay for new transmission lines, and compensate the customers who otherwise would not want to incur the costs.
Conclusion
The benefits of decarbonization may well justify replacing incremental expansions of the transmission system at the request of particular power generators with an alternative approach of long-term collective planning in anticipation of future transmission needs. Policymakers who are charged with such long-term planning should recognize the potential loss of static competition on price and quantity, the potential loss of dynamic competition from entrepreneurial investment and innovation as technologies and market opportunities evolve over time, the likely substantial cost of error, and the continued need for some form of carbon pricing.
A version of this Resources magazine article was first published by Resources for the Future as a working paper called “Is Transmission Expansion for Decarbonization Compatible with Generation Competition?”
A version of this article appeared in print in the Spring 2024 issue of Resources magazine.
