Power Flows: Understanding the Barriers to Electricity Transmission, with Catherine Hausman

Notable Quotes

• Transmission reduces costs and improves reliability: “Transmission … helps us make sure that we’re using the lowest-cost power plants. That can mean lower prices for consumers, and it means burning less fuel. It can also help protect the grid from natural disasters and other disruptions.” (3:12)
• Money wasted due to a lack of transmission: “We’ve been losing more and more money, by which I mean using more and more expensive power plants. Ultimately, [between 2016 and 2022], I find $2 billion in excess costs caused by transmission constraints.” (9:29)
• Aligning incentives for the construction of new transmission: “The challenge for policymakers here is figuring out how to write the rules in the game in a way where the interests of society are aligned with the interests of companies and of transmission planners.” (21:15)

Top of the Stack

• “Power Flows: Transmission Lines, Allocative Efficiency, and Corporate Profits” by Catherine Hausman
• “Transmission Impossible? Prospects for Decarbonizing the US Grid” by Lucas W. Davis, Catherine Hausman, and Nancy L. Rose
• Dog Man books
• Golden Hill: A Novel of Old New York by Francis Spufford
• Project Hail Mary by Andy Weir

The Full Transcript

Daniel Raimi: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future. I'm your host, Daniel Raimi. Today we talk with Dr. Catie Hausman, associate professor at the Gerald R. Ford School of Public Policy at the University of Michigan. Go Blue!

Catie recently published a paper that quantifies the costs of failing to build electricity-transmission capacity that would connect low-cost producers, particularly from renewable sources with demand centers in the Midwest and Gulf Coast. It turns out that these costs are very large and have disproportionate financial consequences on a handful of companies. Catie will tell us how these financial consequences shape companies' behavior and help explain why some of them go to great lengths to try and stop the construction of new transmission. Stay with us.

Catie Hausman, my friend from the University of Michigan. Welcome back to Resources Radio.

Catherine Hausman: Thank you for having me.

Daniel Raimi: Catie, you've been on the show before, but it was four years ago. It was before COVID, the last time you were on the show. So, I want to ask you the same question we ask all of our guests, which is to tell us a little bit about your background and how you got interested in working on environmental issues.

Catherine Hausman: I don't remember what I said last time, but hopefully I'm going to be internally consistent here. I grew up mostly in northern Minnesota, and I spent a lot of time on the north shore of Lake Superior, and the natural environment was just really culturally and personally important, and the preservation of the natural environment was very important to me as a kid.

How I ended up working on climate change specifically goes back to the early 2000s, when Elizabeth Kolbert’s series in the New Yorker got me thinking that climate change was a really pressing issue that I wanted to learn more about.

Daniel Raimi: That does sound consistent with what you said in the past, and I was wondering—I've never asked you this—was iron mining a thing in your community in northern Minnesota? I know there's the Iron Range up there.

Catherine Hausman: We learned about it in school, but it wasn't something that was personally important in my social circle or amongst my friend group.

Daniel Raimi: Great. Well, welcome back to the show. It's great to have you. We won't talk about iron ore, and we won't talk about the SS Edmund Fitzgerald today, but we will talk about electricity. And this is coming from a recent paper that you wrote called “Power Flows: Transmission Lines, Allocative Efficiency and Corporate Profits.”

We're going to break all that down, but before we do that, let's just remind our audience about the importance of electricity transmission and transmission lines in general. We've talked about this before in the show, but if you could just remind us: Why is it important to build lots of transmission in the context of reducing greenhouse gas emissions?

Catherine Hausman: So many reasons. Three—no, four. Bear with me. Quite aside from decarbonization, transmission just helps us make sure that we're using the lowest-cost power plants. That can mean lower prices for consumers, and it means burning less fuel. It can also help protect the grid from natural disasters and other disruptions. Think of Winter Storm Uri in Texas a few years ago. That wouldn't have had nearly the same impact on the grid if the grid had been better integrated between Texas and the rest of the United States.

But you asked about decarbonization, and there's two key reasons I think people should keep it in mind. One is that the best places for wind and solar are largely not the places where people live. At a very basic level—to deliver wind power from Iowa or southern Minnesota to Detroit or down south to New Orleans, we need transmission lines. It's not enough to just build the low-carbon or zero-carbon power plants. You need to physically bring that power to people and to businesses. The second decarbonization reason is that, if we're going to electrify big parts of the economy—think electric vehicles that need to be charged—then we're going to need to build more of everything: more power plants, more transmission lines.

Daniel Raimi: That's great. Tell us a little bit more about this paper. Of course, we'll have a link to it in the show notes so people can check it out. It was published as a National Bureau of Economic Research working paper. What are the questions that you were trying to get at in this analysis?

Catherine Hausman: It's actually, in some ways, a follow-on to another paper. So, we should point people to both. I have an earlier paper with Lucas Davis at the University of California, Berkeley, and with Nancy Rose at the Massachusetts Institute of Technology that laid out at a high level why transmission is important and why it's difficult to build.

But in the paper that we're going to focus on today, I wanted to zero in on two big questions that came up in my earlier work. The first question is just quantifying how much money we could save on generation costs if the grid were fully integrated. Is this enough money that we should really be trying to get past whatever barriers are holding up transmission? I focus on a big chunk of the central United States. You should be thinking Great Plains over to the Great Lakes where I live and then down to the Gulf Coast. For the energy wonks out there, what this means is the MISO and SPP wholesale markets.

Daniel Raimi: Just in case people are really curious about what MISO or SPP stand for …

Catherine Hausman: Yes, thank you. MISO is the Midcontinent Independent System Operator. SPP is the Southwest Power Pool. Basically these are two nonprofit entities that operate the grid in the central United States to make sure that things run reliably and at low cost.

Daniel Raimi: Great. Maybe one more term to define as we keep talking, which is in the title of the paper—you use this term “allocative efficiency.” What is allocative efficiency?

Catherine Hausman: Economists are not great at coming up with words that make sense, are we? So I use this term, because you can say it to any economist, and they're like, “Oh yeah, allocative inefficiencies or allocative efficiencies, those are really important.” What I mean is just being able to use the lowest-cost resources; being able to use the lowest-cost power plants. When I say allocative inefficiencies, I mean burning more fuel than we needed to, because we were using a more expensive or more costly power plant than we needed to.

Daniel Raimi: Perfect, thank you.

One more background question before we get into what you found, which is also for the wonks out there, which is about your modeling approach. Can you say a little bit about the model you built to try to figure out what are these allocative inefficiencies?

Catherine Hausman: Let me say it first in plain English. I'm going to simulate in the paper how electricity markets clear, meaning how these system operators, MISO and SPP, decide which power plants are going to be generating. The lowest-cost generators are going to be able to sell their electricity. The higher-cost generators don't get called on, except for when transmission constraints are binding.

I simulate two different scenarios. One, where the grid is fully integrated, and we can just use all the lowest-cost generators; then, another scenario where transmission constraints mean that sometimes we use more inefficient or more higher-cost plants than we would like to. For the wonks out there, it's a least-cost dispatch model, which is pretty standard in electricity economics and also in engineering.

Daniel Raimi: Great. Just so we have a little bit more intuition on what's happening in the model—in one version of the model, the grid is built out in a way that would be ideal, and in another version of the model, the grid is in its current state of operation?

Catherine Hausman: Exactly. Except I don't necessarily know that I would say “ideal,” because I'm not taking a stand in this paper on how much transmission we should build. There's a lot of other great papers that try to get that number. I'm talking about the hypothetical world where we build so much transmission that electricity could just flow freely wherever we wanted it—without necessarily claiming that that's ideal.

Daniel Raimi: Perfect. All right. So, what'd you find?

Catherine Hausman: What I find is up until a few years ago … because I am able to do this over seven years, 2016 to 2022. In the early part of my sample, we were not losing all that much money by having transmission congestion on the system, meaning, historically, the transmission network mostly matched the kinds of electricity flows that we needed to see. But in recent years, I find that we've been losing more and more money, by which I mean using more and more expensive power plants. Ultimately, by 2022, the end of my sample, I find $2 billion in excess costs caused by transmission constraints.

There's two reasons for this. One is that we are increasingly curtailing wind power, meaning we just dump it, because we don't have the transmission capacity to get that wind power to where people would want to use it. The other reason that the costs grow by 2022 is that, in 2022, you might remember, natural gas prices were especially high because of the Russian invasion of Ukraine. So, using less efficient power plants was especially costly, because we were using expensive natural gas more than we needed to.

Daniel Raimi: That's really interesting. I was just looking up those numbers, and in 2022, benchmark natural gas prices on the wholesale market were over $6 per million Btu, which is a standard metric for gas prices. Today, I think natural gas prices are back down below $2.

Catherine Hausman: Yeah.

Daniel Raimi: Really interesting. Can you talk a little bit about how this issue connects with companies themselves? One of the things you do in the paper is look closely at specific companies—lots of them that might be affected by the build-out of transmission and who wins and who loses. Can you talk a little bit about what you found when you did that firm-level analysis?

Catherine Hausman: For me, that was the most interesting part, because we sort of already know from lots of other papers—academic and also analysis from consulting groups and the government and nonprofits. We already know that transmission costs us money in terms of needing to use more expensive power. But the firm-level or company-level analysis is something that has not been studied as much.

The question I'm asking in the paper is, How would that hypothetical increase in transmission have changed which power plants get dispatched, and therefore, how might the companies that own those power plants feel about it?

As an example, I suspected going in that, if we don't have to curtail as much wind anymore, then obviously that's going to make wind producers feel pretty good. They face higher prices, they have higher levels of dispatch, so they have higher profits. And I suspected that power plants in so-called “load pockets”— that's a term people use for when you're in an area that has insufficient transmission coming in, so you need to use local generation. I suspected that power plants in those load pockets would not want to see transmission increased, because it would mean that they would face competition from those low-marginal-cost wind generators in other parts of the country.

Daniel Raimi: Can you talk a little bit about what you found when you looked at some of those specific geographies, some of those load pockets?

Catherine Hausman: I'll say a little bit about how I do it. I simulate net revenues, so revenue minus the fuel and maintenance costs that you need to operate a plant at every power plant in my sample in every hour across seven years. Then, I aggregate that up to look at patterns across time and patterns across space and across companies in terms of who would win and who would lose from an increase in transmission lines. I find that, not surprisingly, some of the biggest winners from a more integrated transmission network would have been wind producers, but the biggest losers would have been a handful of utilities that own a lot of generation capacity and load pockets.

The magnitude was something I hadn't necessarily been expecting, although it makes sense now that I think about the price changes and quantity changes that we would see with increased transmission. But the four companies in my sample that would lose the most from market integration would've collectively earned nearly $2 billion less in 2022. It's a lot of money on the line when we talk about reallocation of profits across different companies.

Daniel Raimi: Then, one of the things that I like about the title of the paper is you use this term, “power flows,” and “power” means a couple of different things in the paper. We're talking about power like electricity, we're talking about market power, and we're also talking about potentially political power.

Catherine Hausman: Exactly.

Daniel Raimi: Can you talk about the sort of implications for those companies that stand to lose so much? Maybe it's obvious, but can you spell it out?

Catherine Hausman: Yes. Shout out to my colleague, Devin Judge-Lord, for suggesting that title, if I remember right. He's a political scientist, so he goes straight to that exact play on words that you were talking about. Let me say a little bit about where those companies are located that would see the most losses from transmission integration and what that means for real-world policy and transmission planning.

If we zero in on the MISO region that I study, that's the market that runs from the Great Lakes to the Gulf Coast. I find that a lot of the gains from transmission in terms of lowering costs would have been between the north and south of MISO. As in, right now, there are high-cost generators operating in MISO South in the Gulf Coast region, and we could be using lower-cost generators in MISO North. This is not a new fact.

This has surprised approximately nobody who knows MISO and knows this middle part of the country in these wholesale markets. There's a lot of talk about the disconnect between MISO North and South in the related policy space, but what it would mean to build more lines is that those power companies in MISO South wouldn't earn as much money. Renewable producers have accused those MISO South power companies of blocking new transmission lines using a variety of tactics that are completely legal doing what companies do best, which is maximizing profits for the return for their shareholders.

Daniel Raimi: What are some examples of those tactics that companies have been accused of, and how credible do you find them?

Catherine Hausman: Good question. I'm not doing investigative reporting here on company behavior, I'm going to leave that to other folks, but something that a fair number of analysts agree on is that, twice, MISO tried to build new lines that would've better connected MISO South. During the delays in getting those lines built, two new large natural gas plants were instead built in MISO South, which rendered those transmission lines unnecessary.

That gets at a fundamental question that we ask a lot in power markets, which is when you build new power plants versus when you build new transmission lines. In this particular case, building those power plants is going to be good for the generation companies that are located in that area. But it may be that what's best for society as a whole is, instead of building that new capacity, you instead improve market integration, allow more renewables to come online, allow more low-cost generators in other areas to instead be dispatched.

Daniel Raimi: Better for society as a whole and better for ratepayers who are located in MISO and paying those higher costs.

One question: I was just looking at a map of MISO, and MISO has this really weird shape. It's like a big blob that goes across the Dakotas and Minnesota and Michigan and Illinois, and then, there's a really narrow band that runs around western Tennessee, and that's where it connects to the southern region of Arkansas and Louisiana and Mississippi. Does the geography of MISO have anything to do with this? Is it the fact that there's this narrow band through which you can connect the northern and southern parts of the state? Does that make it easier to delay transmission? Does it make it harder to build transmission?

Catherine Hausman: You're entirely right that MISO is two blobs connected with a narrow little connection point between them. Keep in mind that you could improve transmission flows not only by connecting MISO North directly to MISO South, but you could also go east or west. You could connect MISO South to its neighbors to the east or west, so it doesn't have to go through that sort of skinny cord or connect directly to MISO North.

The reason that MISO has this funky shape is that, up until about a decade or a decade and a half ago, it was just the northern part. MISO was smaller, and it expanded its footprint, precisely because there were worries that companies in MISO South were not using their transmission assets competitively or that they were using their transmission assets to block competitor power plants. And so they were added into MISO South for some of the same reasons that we're thinking about today.

Daniel Raimi: Interesting, okay. So, this MISO South issue is something that people have known about for a long time. Very interesting.

One question that I'd love to ask you about, and this is kind of speculative, and you don't really focus on it in the paper, but I'm curious how you think about it. When people talk about the challenges of building out transmission, a lot of times they talk about people who don't want power lines built in their backyard—not-in-my-backyard syndrome, or NIMBY-ism, as a major barrier. When you think about the profits that certain companies stand to lose in the build-out of transmission, do you think that is playing a similarly important role to NIMBY-ism? Or how does it connect with NIMBY-ism? Can you just talk about that issue a little bit?

Catherine Hausman: There's multiple barriers to getting transmission built. How do we think about which one is worst? Which one should policymakers tackle first? You named acquiring land rights, getting people to agree to building the physical lines. That's one barrier. Getting past environmental rules, like NEPA-type rules or other land use rules, is another barrier. The physical cost of building a bunch of steel and wires is another barrier. One other barrier to think about, which doesn't necessarily show up in other big infrastructure projects but does show up in transmission, is this idea of cost allocation.

Suppose I'm building a line from Texas north to Minnesota, and that line is going to cross Oklahoma. Then, who should be paying for that line? Consumers in Texas or Minnesota or Oklahoma or some combination? It's an oversimplification, but you get the idea that it's tricky to figure out how to split up the costs.

We've got all of those barriers plus the sort of political-economy barriers that I'm writing about. And I don't know, to be honest, which one is most binding or most problematic. I think that the challenge for policymakers here is figuring out how to write the rules in the game in a way where the interests of society are aligned with the interests of companies and of transmission planners.

Something I write in the other paper, the one with Lucas Davis and Nancy Rose, is, "The challenge is not just the numerous agencies, but the potential throughout for these processes to be co-opted by private economic interests." We suspected that these various regulatory hurdles interact with and exacerbate the ability of incumbents to slow down the process, and all of it is made worse by a lack of transparency and a lack of a central authority that can really push transmission forward.

Daniel Raimi: Catie, you mentioned policymakers. When we talk about policymakers in this context, what policymakers are we talking about? Are we talking about state utility commissions? Are we talking about the Federal Energy Regulatory Commission? Are we talking about MISO? Who are we talking about?

Catherine Hausman: All of those and more. So many agencies are involved. At the federal level, the Federal Energy Regulatory Commission regulates transmission and has over the years put out various new orders to try to allow transmission to move forward in a more streamlined manner. Also, yes, these independent system operators and the other regional transmission organizations (RTOs) that operate around the country. Yes, state-level authorities, and yes, the utilities themselves, because the regional transmission organizations are made up of different stakeholders, and generation utilities have a big say in what happens at the level of the RTOs.

Daniel Raimi: Is this one of the reasons why utilities have the ability to exercise their power in this way? Is it partly because there are just so many agencies involved, the complexity of the decisionmaking process is such that you just need a lot of money and a lot of capacity to be able to intervene effectively in these processes?

Catherine Hausman: I think it's the complexity. I also think it's the lack of transparency and, in cases, it's just the direct rules around things like how the RTOs manage their internal decisionmaking processes. Sometimes it can mean that utilities just have actual direct votes over what happens. It can also be that utilities can sort of slow-walk the processes of transmission planning if they think that those new lines might disadvantage their generation assets. I think the best research on this is by the legal scholars who understand the ins and outs of these governance questions a lot better than I do. Joshua Macey and Alex Klass are two great legal scholars operating in this space.

Daniel Raimi: I think there's also a really interesting project that we've talked about on the show before, which is RTOGov. People can search for that and check out the RTOGov project, which is very interesting as well.

Well, Catie, this has been a fascinating conversation. Is there anything that I haven't asked you about that you think I should have?

Catherine Hausman: I think the main takeaway that I have from this work for myself and for my own research and policy work going forward is remembering that we need to make sure that, across all of our decarbonization efforts, we're not letting incumbent companies determine the rules of the game, because we need to be thinking about lots of other stakeholders besides the incumbent companies. Obviously, we need to think about ratepayers, we need to think about the natural environment, and we need to think about the opportunities for new companies to be entering the space with new technologies and new business models. I think that that question of how governance happens for climate policy is just super important.

Daniel Raimi: That's a great point and a great note to end on. Now, I'd love to ask you about something a little bit more fun, which is asking you to recommend something that you think is great. It can be a paper or a book or a movie or a podcast. It can be related to the environment or not. I'm pretty sure last time you were on the show, you recommended a Dr. Seuss book, so I'm wondering if you're going to do that again. Catie, what's at the top of your literal or your metaphorical reading stack?

Catherine Hausman: Top of the Stack—I love Top of the Stack, because I literally picture the reading stack in my room, and last time I said Hop on Pop. We have moved on with kid number two to Dog Man, and I love Dog Man.

Daniel Raimi: Yes, I was recently introduced to Dog Man by my five-year-old, and it's pretty wild.

Catherine Hausman: It's delightful.

Daniel Raimi: It's totally bizarre.

Catherine Hausman: It's completely bizarre and delightful. But actually, the things I was going to name, which are also delightful and a little bit bizarre, maybe like Dog Man for grown-ups—hopefully, the authors aren't going to be offended that I said that … Most of your guests give you nonfiction recommendations with smart facts, but I'm going to go with deeply entertaining fiction. Golden Hill is delightfully, darkly hilarious, and Project Hail Mary for all of us nerds who love the thrill of research and discovery and the friends we make along the way.

Daniel Raimi: That sounds really fantastic. Thank you, Catie. We have an extra minute, and I can't help but ask you—we were arguing on Twitter recently about pasta. So what do you have against bow tie pasta, Catie Hausman?

Catherine Hausman: I think I've made some enemies on Twitter this week with my takes on bow tie pasta. With the shape, you've got crimping in the middle—like, chunkiness in the middle, and you've got scalloping floppy edges on the outside, which means you cannot get the perfect texture. Either your middle is too crunchy or your outside is too mushy.

Daniel Raimi: I think there's kind of a beauty, though, in the little bit of crunch you get sometimes when you do the al dente bow tie pasta.

Catherine Hausman: I want my pasta to be al dente, and I don't want the mushiness on the outside. You're wrong.

Daniel Raimi: We'll have to say that argument for another day. Next time you come over for dinner, I'm making bow tie pasta.

Okay, Catie, this has been super fun. Hopefully, listeners haven't totally tuned out by now, but thank you so much for coming on the show and sharing this really interesting paper. I think it sparks a lot of important discussion and critical thinking around these topics, so thank you so much for writing it and for coming on the show.

Catherine Hausman: Thank you, Daniel.

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