Congestion in General Equilibrium: Nodal Electricity Pricing, Production, and Welfare

Abstract

When a transmission network is congested, localized demand shocks change electricity prices at every node. Whether and how those price changes affect local wages and welfare depends on how firms and households adjust their electricity consumption, which in turn reshapes the dispatch and the prices themselves. This paper defines a power-flow general equilibrium (PFGE) that embeds the KKT conditions of a DC optimal power flow inside a general equilibrium model with production and factor markets, so that locational marginal prices, firm output, wages, and household income emerge as a fixed point. Because the OPF is solved endogenously, rather than fed observed nodal prices from an ISO, the model supports counterfactual policy analysis: a new load re-optimizes dispatch, shifts which lines bind, and changes prices throughout the network. We prove existence via Brouwer’s theorem. The main analytical result is a decomposition: the standard CGE commits a spatial averaging error proportional to congestion rents, and the standalone OPF commits a demand rigidity error proportional to the price elasticity of electricity demand. Both models coincide with the PFGE if and only if a congestion-elasticity interaction term I_i is zero at every node. A three-bus illustration calibrated loosely to the PJM data center problem confirms that both error channels are quantitatively nontrivial and that the standalone OPF substantially overstates the cost of a new load when demand response is ignored.

Dylan Lucko

Predoctoral Researcher, EconClimate Lab

Dylan Lucko is a founding researcher at the Kleinman Center’s EconClimate Lab, where he leads development of the Lab’s research agenda on decarbonization, industrial policy, and market dynamics.