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2009 State of the Market Report

Prices and Revenues

The average all-in price for 2009 was $31.28 per MWh, a 40 percent decrease from 2008. Real- time energy prices are the dominant component of the all-in price. Real-time prices decreased by 45 percent from 2008 to 2009 due to sharply lower natural gas and coal prices and lower load, particularly during the summer months.

Average real-time uplift costs also decreased considerably, declining 16 percent from 2008. Uplift costs remained a very small percentage (less than 1 percent) of the all-in price. Capacity and ASM costs each comprised a very small portion of the all-in price, except in July when the VCA auction cleared at a high price due to large amounts of capacity that was not offered. Although only a small amount of capacity cleared in the auction, the VCA spot price is used in the all-in price because the spot market drives the forward bilateral prices.

The figure shows that prices were correlated positively with natural gas prices, even though low load levels resulted in fewer hours with natural gas units on the margin. The fact that electricity prices were highly correlated with fuel prices indicates that the Midwest ISO energy market performed competitively in 2009. Suppliers in a well-functioning, competitive market have the incentive to offer energy at their marginal cost. Since fuel costs represent the majority of their variable production costs (i.e., marginal costs), generators’ energy offers tend to rise in step with fuel costs in a competitive market. Therefore, the correlation of fuel prices and electricity prices indicates that the markets are performing competitively.

Our next analysis shows the range of hourly prices in the real-time energy market in the form of a price-duration curve. A price-duration curve shows the number of hours (horizontal axis) when the LMP is greater than or equal to a particular price level (vertical axis). For example, the curve for the Cinergy Hub indicates that in approximately 800 hours during 2009 the Cinergy Hub price exceeded $50 per MWh. Figure 2 shows the real-time energy price-duration curves for four representative Midwest ISO hubs. The table in the figure summarizes the highest and lowest prices each year from 2007 to 2009.

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