Competition Requires Transmission Capacity: The Case of the U.S. Northeast

Abstract:     
This article examines the ability of the electrical grid to support trade in real power in the northeast U.S. power market. The authors estimate the effect on prices in New England (NEPOOL) and New York (NYPP) of greater exports from Michigan, Indiana, Kentucky, Ohio, West Virginia, and northern Virginia (ECAR), and most of Pennsylvania, New Jersey, and Maryland (PJM). In the authors' simulation, despite the availability of low-cost capacity in PJM and ECAR, prices near Buffalo and throughout most of New England remain high because transmission constraints prevented low-cost generators from selling power to these areas. To increase actual supply and to reduce further the price differences requires changes to the grid itself. The authors explore two commonplace remedies: increasing local supply and increasing import potential. Both greatly reduce prices. The authors conclude that policies that allow competition only among electric generators without additional changes in the design and regulation of the transmission system will not deliver the dramatic price reductions that led policymakers to introduce competition into generation.

JEL Classification: L51, L94

Accepted Paper Series