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2009 State of the Market Report

Executive Summary

The figure also shows the estimated annual cost of each unit type, which is the minimum annual net revenue that would be needed for these investments to be profitable. The net revenue analysis indicates that net revenues for both a new combined-cycle unit and combustion turbine were substantially less than the annual cost of new entry for both technology types in 2009, even in the highest-priced regions. This is consistent with expectations because the Midwest ISO footprint continues to exhibit a sizable capacity surplus and did not experience significant periods of shortage in 2009.

Even though shortages were not frequent, shortage pricing improved considerably in 2009 with the introduction of AS markets, which are jointly optimized with energy markets. When resources are not sufficient to satisfy reserve requirements, the operating reserve demand curve will set reserve prices and consequently improve energy price signals. The Midwest ISO is working on pricing changes to allow peaking units and interruptible load to set prices, which would further improve efficient shortage prices and increase net revenues. Long-term market signals also improved in 2009 with the introduction of the VCA, which is a monthly spot market for capacity that provides an additional means for loads to satisfy their Module E capacity requirements. As excess capacity in the region declines, it will be important that the Midwest ISO’s markets send efficient long-term signals. To that end, we recommend several improvements to pricing mechanisms in this report.

C.

Day-Ahead and Real-Time Market Performance

The spot markets for electricity run by the Midwest ISO operate in two timeframes: the actual operating timeframe referred to as the real-time market and one day in advance of the operating timeframe referred to as the day-ahead market. The real-time market reflects the actual physical supply and demand conditions at any point in time. The day-ahead market is largely financial and establishes financially-binding, one-day forward contracts for energy and ancillary services. This section of the executive summary describes our evaluation of the day-ahead and real-time markets.

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