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2009 State of the Market Report

Executive Summary

Despite the introduction of the ASM and VCA, overall incentives for investment remained weak in 2009 due to the surplus capacity in the region. In long-run equilibrium, markets should provide net revenues that provide efficient incentives for investment and retirement. This report shows that the net revenues provided by the Midwest ISO markets in 2009 would be insufficient to cover the annualized cost of new investment for a generic combined-cycle unit or gas turbine. This is consistent with expectations for a well-functioning market because the prevailing capacity surplus and relatively low load should not produce incentives to build new resources.

Although new resources are not needed currently for reliability, the Midwest ISO continues to develop and promote various changes to its market design and operating procedures to allow additional resources – particularly intermittent resources, Demand Response (“DR”) resources, and interruptible load – to integrate more fully into its existing markets. The Midwest ISO is anticipating an additional 1,600 MW of wind generating capacity by the summer of 2010. Although wind provides substantial environmental benefits, its intermittent nature limits its contribution to reliability and resource adequacy in the long-run. It also creates operational challenges that the Midwest ISO is working to address in the short-run.

Given the importance of external transactions and the extensive network interactions in the Midwest, our report evaluates the interchange and coordination with neighboring areas. The Midwest ISO continues to rely heavily on imports from adjacent areas, averaging 3.6 gigawatts (“GW”) in the peak hours of 2009 and 2.4 GW in the off-peak hours. The prices at the border between the markets are well arbitraged in most hours, but could be improved by optimizing net interchange, particularly with the PJM Interconnection (“PJM”). In addition, transaction scheduling around Lake Erie remained an issue in 2009 and generated significant un-scheduled power flows (i.e., “loop flows”). The Broader Regional Markets (“BRM”) Initiative being jointly developed by the Regional Transmission Organizations (“RTOs”) around Lake Erie consists of a package of physical and market solutions that we expect will substantially improve the efficiency of scheduling and pricing throughout the Midwest ISO, New York Independent System Operator (“NYISO”), Independent Electricity System Operator of Ontario (“IESO”), and PJM footprints.

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