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2009 State of the Market Report

Demand Response

In prior State of the Market reports, we showed that when the Midwest ISO has called for load curtailments under emergency conditions, prices have generally been understated and have not efficiently reflected the shortage (or the value of the foregone consumption). One such event occurred on August 1-2, 2006, when extremely high temperatures throughout the Midwest ISO region resulted in record electricity demand. Emergency procedures were invoked by the Midwest ISO that resulted in voluntary load reductions of close to 3,000 MW. Prices during peak hours on August 1, however, ranged from $50 to $150 and were less than $100 in the highest demand hour. These prices did not reflect the conditions that triggered the load curtailments.

When DR resources do not set prices, as in the example above, a key component of the economic signals needed to support investment in generation, transmission, and demand-side management is undermined. Hence, it should be a high priority of the Midwest ISO to permit all such resources to set energy and ancillary services prices at efficient levels when DR is implemented. This will improve the markets economic signals by accurately reflecting the value of the energy provided. Further integrating this capability into the market will be challenging. In its most recent compliance filing with the Commission on the matter, the Midwest ISO stated that “current systems are not adequate to permit this because such resources are not able to move incrementally in response to small changes in conditions.”27

The same issue prevents peaking resources from setting prices when they the marginal resources, but are being dispatched at their economic minimum or economic maximum. The Midwest ISO has been working on a means to set prices that would reflect the marginal offer costs of peaking resources when they are needed.28 This work is encouraging and we believe that it may be possible to utilize this approach to allow DR resources to set prices as well. Hence, we recommend the Midwest ISO consider this approach or others that would allow DR resources to set prices in the real-time energy market when they are the marginal resources, notwithstanding their general lack of flexibility.

27

Midwest Independent Transmission System Operator (2009). “EDR Quarterly Report Filing,” filed before the Commission, October 21, 2009. Docket No. ER08-404-000.

28

Generally referred to as “Convex-Hull Pricing”.

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