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2009 State of the Market Report

Prices and Revenues

Compared to 2008, net revenues were 4 to 32 percent higher for combustion turbine generators in 2009 across the footprint, even though operating hours are modestly lower (especially so in the West). This increase is entirely due to the net revenues attributable to the capacity market, most of which is associated with the spike in capacity prices that occurred in the July 2009 Voluntary Capacity Auction. Absent the VCA results from July, the net revenues would have been lower in each of the areas studied. In contrast to the result for combustion turbines, the estimated net revenues for a new combined cycle generator were 18 to 45 percent lower in 2009. This net revenue reduction was despite the fact that a new combined cycle generator would generally have run more in 2009 because natural gas prices fell more sharply than coal prices. Nonetheless, the loss of inframarginal revenues associated with less frequent periods with very high energy prices led to lower net revenues in 2009.

For both types of units, the net revenues are substantially below the estimated annual cost of entry, notwithstanding the addition of the AS markets and the capacity market. These entry costs are shown in the figure as horizontal black segments. The estimated cost of new entry for a new combustion turbine increased from $90 per kW-year in 2008 to $96 per kW-year in 2009 due primarily to an increase in capital costs. Likewise, the cost of entry for a new combined cycle unit increased to more than $130 per kW-year. These annualized costs far exceed the estimated net revenues in even the highest-cost areas.

The net revenue results are 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

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