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2009 State of the Market Report

V.

Transmission Congestion and Financial Transmission Rights

One of the primary functions of the Midwest ISO energy markets is to meet load requirements with the lowest-cost resources given the limitations of the transmission network. The locational market structure in the Midwest ISO is designed to ensure that transmission capability is used efficiently and that energy prices reflect the marginal value of energy at each location. Congestion costs arise when flow limits on transmission lines prevent lower-cost generation on the unconstrained side of a transmission interface from replacing higher-cost generation on the constrained side of an interface. The results are higher LMPs in the constrained area. An efficient system typically will have some congestion because investment in transmission to alleviate the congestion should only occur when the cost of such investment is less than the benefit of eliminating the congestion.

When congestion arises, the difference in prices across the interface represents the marginal value of transmission capability between the two areas. When power is transferred across the interface up to the limit, congestion costs are approximately equal to the difference in LMP prices across the interface multiplied by the amount of the transfer. These congestion costs are collected by the Midwest ISO in the settlement process through the congestion component of the LMP. Net load in the constrained area settles at the constrained area price and the net generation in the unconstrained area settles at the unconstrained price. As a result, more payments are received from the load than are paid to the generators. These excess payments are congestion costs. Locational prices that reflect congestion provide economic signals that are important in managing congestion on the transmission network in both the short run and long run. These signals are important in the short run because they allow generation to be efficiently redispatched to manage the network flows. They are also important in the long run because they govern investment and retirement decisions.

In this section of the report, we evaluate congestion costs, FTR market results, and the Midwest ISO’s management of congestion during 2009. We begin this section by presenting an overall summary of congestion costs incurred in the day-ahead and real-time markets.

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