2009 State of the Market Report
significant in 2009 as in prior years, although outages in Michigan resulted in higher prices in that area in October.
Day-Ahead and Real-Time Price Convergence
Our next analysis examines convergence of day-ahead and real-time energy prices. Good convergence between day-ahead and real-time prices is a sign of a well-functioning day-ahead market. Since the day-ahead market determines most of the energy settlements and generator commitments in the Midwest ISO region, good price convergence with the real-time market helps ensure efficient day-ahead commitments that reflect actual real-time operating needs.
Participants’ day-ahead market bids and offers should reflect their expectations of market conditions the following day, but a variety of factors can cause real-time prices to be significantly higher or lower than expected. While a well-performing market may not result in prices converging on a daily basis, it should lead prices to converge well on a monthly or annual basis. A modest day-ahead price premium is rational because purchases in the day-ahead market are subject to less price volatility (which is valuable to risk-averse buyers). Additionally, purchases in the real-time market are subject to allocation of real-time RSG costs (which are much larger than day-ahead RSG costs). The current RSG allocation methodology imposes disproportionately large costs on virtual supply transactions. This has contributed to sharp declines in virtual activity and contributed to larger price differences by reducing the effectiveness of the arbitrage by participants. This is discussed in more detail later in Section IV of the report.
To evaluate how well day-ahead and real-time prices converged in 2009, Figure 17 shows monthly average prices in the day-ahead and real-time markets at the Cinergy Hub, along with the average RSG cost per MWh. The table below the figure shows two measures of price convergence for four representative locations:
The difference between the average day-ahead and real-time price, which measures overall convergence; and
The average of the hourly absolute value of the day-ahead and real-time price difference. This shows the typical difference regardless of whether the difference was positive or