Aesthetically I agree that NiGHTS is a beautiful game, still mesmerizing to me, and it's visually very busy and exciting. But it's also '2.5D' strictly speaking, which doesn't technically lighten the rendering workload in any 1:1 sense, but because the camera is fixed and the composition of the image is relatively constant and predictable many more sins can be hidden. Even then the draw-in is conspicuous, but also constant so you stop noticing. A lot of the image relies on flat scaled sprites as well, which is not to criticize, it still looks amazing in motion, but it is less taxing for the VDP1. Indeed NiGHTS is perfectly suited for the Saturn's strengths, and subjectively I even agree with you edge, but it's definitely not technically superior to Sonic R or even a match as a raw benchmark.
And Geoffrey... I'm mostly thinking out loud here but I think you know that already, and I hope it doesn't come across too much as a lecture, I know I'm preaching to the choir as well. I'm sure of about half of it and the other half is extrapolation from what I'm sure of. For example, one thing that video didn't clarify is the fact that the reason you see either sprites blending with other sprites ("foreground") OR sprites blending with the VDP2 ("background") is because the VDP2 generates the final display, and the display order only goes one direction. So whether it is background planes blending with other background planes, or sprite/foreground channels blending with the background, if it includes the background/VDP2 display data then the blending must be done by the VDP2. Which is the no-cost function; since I know how it must work, and every example bears it out I'm sure of that. So now I've almost fully convinced myself that it is a single channel as well, it is probably the one VDP2 blending function that can either operate on an entire background plane - which is just like the only mode for transparencies the SNES had - or that blending function can instead be slaved to the sprite alpha channel, in which case there is still no performance cost, other than the alpha channel data itself. But you will always see the translucency effect "penetrate to the background" as Low Score Boy puts it. lol
Only when sprites are blended with other sprites is it done in VDP1, so that's a different function, and watching the Sonic R video I saw again how the shield effect only appears blended with the other sprite or VDP1 elements. (I've never owned the game and it's been a LONG time since I played it on loan), so that's that.
As for the ultimate limitations, if it's even theoretically possible to combine both functions for a flawless/universal tranlucency effect, would probably depend on whether the same alpha channel format is used for both functions or not - just think of it as the same control switch. If it is then it would need to operate in either one mode or the other, which would be my guess since I've never seen it. But there is one more wrinkle, because iirc the Saturn special stage in Symphony of the Night shows both the translucent sprites and another darkening effect simultaneously - which is also what made the use of the dithered light shafts in other areas so irritating to me - so there may be another simple luminance modifier function, which is still kind of a translucency effect but not color blending per se. So I'm almost sure about that now, which is a bit disappointing, but it makes sense of almost everything I've noticed before.
Which mainly leaves the question of how and why the VDP1 blending is such a problem that most games didn't even try to use it. I've seen mentions of a requirement to write the other sprites first or something like that, which is almost both obvious and counter-intuitive at the same time to me. It is even possible that the sprite flickering I've mentioned is a red herring, which would offer an alternative explanation that turns the "sprites" almost into a lie and the whole puzzle is more mundane in a way, but I don't think that's likely. Regardless I'm probably overthinking it, and the reason Lobotomy and a few other games appear to make it look easy is just because they've been budgeted and optimized to factor in the performance overhead, whatever it is. I still think it's telling that PSX Exhumed didn't pull off the flare lighting in the same form, in theory it should have been able to regardless, so it must have simply been a performance concession.
Thanks for the excuse to obsess over this all over again, I'm sure it would look sad to most people, I can still get so excited about the specs of a 20 year old games console! I think I will have to search for some answers at least about the slavedriver engine now, but in a way it's also too fun to try to figure it out.