Transmission Constraints, Intermittent Renewables and Welfare

This paper extends the transmission framework from Joskow and Tirole (2005) to show how intermittent renewable capacity increases interact with transmission constraints both theoretically and empirically. The main prediction of the model is that transmission congestion leads to mitigated benefits from renewables due to lack of electricity to be traded to high priced market settlement points. We use the roll-out of a large transmission expansion in Texas’ electricity market to verify and estimate the model’s parameters to measure the impacts of changes in transmission constraints on the benefits of increased renewable capacity accounting for both market impacts (reduced price discrepancies due to additional electricity trade) and non-market impacts (forgone emissions). We find that in the case of ERCOT the benefits of the expansion were roughly $150M/year and $300M/year in emissions reductions. We also provide evidence of a highly asymmetric incidence of the transmission project while wind farms benefited fossil fuel generators suffered. At construction costs of over $3B, the results highlight how the returns to this expansion depend critically from how CO2 and other air pollutants are valued. JEL Codes: D03; Q58