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2009 State of the Market Report

Executive Summary

A.

Summary of Findings

Overall, we found that the market performed competitively in 2009. Although certain suppliers in the Midwest ISO have local market power, our analysis raised no competitive concerns that suppliers withheld resources to raise prices.

Energy prices decreased by roughly 45 percent from 2008 to 2009 due to sharp reductions in fuel prices and lower load. In a competitive market, suppliers will face strong incentives to offer their supply at prices close to their short-run marginal costs of production, the vast majority of which are fuel costs for most generators. Natural gas prices decreased by 55 percent on average, while oil prices declined by 44 percent. Illinois Basin and Powder River Basin coal prices decreased by approximately 30 percent. In a competitive market, suppliers will face strong incentives to offer their supply at prices close to their short-run marginal costs of production, the vast majority of which are fuel costs for most generators. The continuing close correspondence of energy prices and fuel prices in the Midwest ISO is a demonstration of the competitiveness of Midwest ISO’s markets.

After adjusting for lower fuel prices, real-time energy prices still fell by almost 15 percent in

  • 2009.

    This indicates that several other factors contributed to lower energy prices, including:

    • Average load served by the Midwest ISO decreased by 6.6 percent compared to 2008 due to mild weather and poor economic conditions;

  • Large quantities of surplus capacity in the Midwest ISO region and low peak demands led to relatively few operating reserve shortages and associated peak energy pricing;

  • Substantial increases in generation from wind resources in 2009 lowered prices by displacing higher-cost resources and contributing to surplus generation in real-time; and

  • Improved optimization of energy and reserves under ASM.

In addition to the lower energy prices, congestion costs fell by 37 percent in 2009 and RSG costs fell by 47 percent. These reductions were primarily due to:

  • Lower fuel prices;

  • Lower load;

  • Transmission upgrades that relieved a number of key constraints; and

  • Improved supply flexibility under the ASM.

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