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2009 State of the Market Report

Prices and Revenues

Natural gas and oil resources typically set prices during the highest-load hours. Hence, these fuel prices have a larger effect on the load-weighted average prices than the percentages suggest. Natural gas-fired, oil-fired, and dual-fired resources set prices in 20.5 percent of intervals during 2009, but almost 28 percent of all real-time energy costs were incurred when these resources were on the margin. This is a significant decrease from 2008, when these resources set prices in 34 percent of hours, which accounted for nearly one-half of all real-time energy costs. Some of this decrease is likely due to the lower congestion in 2009 causing natural gas-fired units to be used less frequently to manage congestion.

B.

Net Revenue Analysis

The previous subsection provided a summary of the Midwest ISO energy market prices in 2009. In this subsection, we evaluate the resulting economic signals associated with these prices. Our evaluation uses the “net revenue” metric, which measures the revenue that a new generator would earn above its variable production costs if it were to operate only when revenues from energy and ancillary services exceeded its costs. A well-designed market should allow a new entrant to earn a level of net revenue that is sufficient to finance new investment when new resources are needed. However, even if the system is in long-run equilibrium, random factors in each year will cause the net revenue to be higher or lower than the equilibrium value (e.g. weather conditions, generator availability, competing fuel prices, etc.).

Our analysis examines the economics of two types of new units: a natural gas CC unit with an assumed heat rate of 7,000 Btu per kilowatt-hour (“kWh”) and a natural gas CT (or “gas turbine”) unit with an assumed heat rate of 10,500 Btu per kWh. We also incorporate standardized assumptions for calculating net revenues put forth by the Commission that account for variable Operations and Maintenance (“O&M”) costs, fuel costs, and forced outages. In addition to energy revenues, our analysis for 2009 considers revenues from capacity and ancillary services markets, which have improved the long-run economic signals provided by the Midwest ISO markets.

Figure 6 shows net revenue provided by the Midwest ISO markets from 2007 to 2009. To determine whether these net revenue levels would support investment in new resources, the figure also shows the estimated annualized cost of a new unit (which equals the annual net

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