2009 State of the Market Report
The capacity cleared in the VCA is a small portion of the total designated capacity, ranging from 0.1 percent in August to 1.2 percent in November. The VCA is serving as a balancing market with most LSEs’ needs satisfied through owned capacity or bilateral purchases. The total capacity available significantly exceeded the requirements (from a minimum of 12 percent for August to a maximum of 51 percent for October). This fluctuation occurs because the monthly requirement is based on the forecasted peak energy demand for the month. The VCA clearing prices have been close to zero in most months, which is consistent with the substantial capacity surplus prevailing in the Midwest ISO.
The high capacity clearing price in July was the result of the peak demand for capacity and large quantities of capacity that were not offered into the VCA. We attributed these results to inexperience with this new market and uncertainty regarding a retail load auction occurring in the same timeframe.
Finally, we have concerns regarding the ability of participants to import and export capacity, particularly with PJM. Capacity markets serve an important role in providing long-term economic signals to govern investment in the RTO markets. However, capacity prices will only be efficiently determined if participants are able to freely import and export capacity to arbitrage capacity price differences between markets to the extent that the physical transmission capability allows. Therefore, it is critical to identify and eliminate barriers that inefficiently hinder such transactions.
Summary of Recommendations
Although the markets performed well in 2009, we recommend the Midwest ISO consider the following improvements:
Develop real-time software and market provisions that allow gas turbines running at their EcoMin or EcoMax to set energy prices.
This change would improve the efficiency of real-time prices, improve incentives to schedule load fully in the day-ahead market, and reduce RSG costs. To set prices correctly, the market must distinguish between gas turbines that are needed versus those that would be shut-down if