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2009 State of the Market Report

Market Performance

An average of 227 MW was dispatched per hour in 2009, down from 267 MW in 2008. A heat wave in late June led the Midwest ISO to commit 3,500 MW of peaking units in a single day, the highest hourly dispatch of peaking units for the year. The reduction in dispatch of peaking resources can be attributed to a number of factors, some of which have been discussed previously in this report. Load was more fully scheduled in the day-ahead market in 2009, thereby reducing the need for real-time commitments. In addition, lower average and peak load levels and modest reductions in congestion levels have further reduced the need for peaking units to satisfy overall demand or to manage local transmission constraints.

The figure also provides an evaluation of the consistency between the peaking resource dispatch and market outcomes. In the top panel, we compare the average LMP at the peaking resources’ locations (On-Line LMP) to the average offer price of the dispatched peaking resources (On- Line Offer). In the bottom panel, we show the shares of the peaking resource output that are in- merit (LMP greater than offer price) and out-of-merit (LMP less than offer price). Approximately 33 percent of the dispatched peaking resources in 2009 were in-merit, down from 45 percent in 2008. Because out-of-merit units have costs that exceed the prevailing LMP, the large amount of out-of-merit peaking units indicates that they continue to set the energy price infrequently. This is not uncommon because gas turbines often have a very narrow operating range and, therefore, tend to operate at their dispatch minimum or maximum.

When peaking (or demand response) resources are the most economic option for meeting the markets’ demands but do not set prices, real-time prices will generally be inefficiently low. This affects the incentives to schedule in the day-ahead market and, ultimately, the commitment of resources that is coordinated by the day-ahead market. A suboptimal commitment coming out of the day-ahead will tend to raise real-time production costs. Inefficiently low real-time prices when peaking resources are dispatched also distorts the incentives of participants to import and export power efficiently. We have recommended changes to improve real-time pricing by allowing peaking resources and demand resources to set prices. The Midwest ISO has done substantial work to develop a feasible approach in this area

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