Why does Generation not Occur at 220 kV?

Remember too that you will not see an oil-insulated generator! The 220kV transformer will have oil as its main insulation, which has high dielectric strength as well as thermal transfer properties useful to the application. You won't see a transformer with dry-type insulation (solid insulation such as varnish, enamel, epoxy, etc.) at much higher voltage than about 15kV because of that - you can't get enough electrical insulation from it without having it so thick that you have thermal insulation problems as well as physical construction problems.

Theoretically generator could be designed at 220KV but practically it gives rise to many problems. The stator coils are housed in iron core slots (unlike transformer winding) which are at ground potential. The surface of coils as well that of stator core are not smooth and therefore there are always an air gaps. At these locations corona discharges take place. These discharges reduce the life of insulation. Unless the stator winding is directly cooled (heat has not the cross the insulation ), higher insulation thickness will make cooling of stator extremely difficult and uneconomical. All the electrical clearances will have to be increased (as rightly commented by other member, generators are not oil cooled like transformers). When coils come out of core, the electrical stress distribution pattern changes and coils outer surface away from the core end, attains almost copper potential. A transition from full voltage drop across the insulation (in side the slot) to almost zero drop (just out side the slot) causes flash overs. Therefore a very strong stress grading system is required to be designed for it. It would be very costly as well as difficult to achieve. All these difficulties limit the common generation voltage to around 27-30KV.

The utilization factor of stator slot (ratio of copper area to slot area) will be extremely low. For high voltage, either very large number of turns are required, or very voltage per turn will have to be generated. It will require large size of core resulting in extremely heavy and dimensionally big generator.

There is optimization process for every design which decides ratio of copper and the steel in any electrical machine from cost, size and weight (and off course practical difficulties) considerations.