The markets in New England – in constrained areas and the broader market – performed competitively in 2011, according to Potomac Economics, ISO New England’s external market monitoring unit.
An ISO spokesperson told TransmissionHub June 27 that the annual reports from the internal and external market monitors who evaluate New England’s wholesale electricity markets show that the markets continue to operate competitively.
“Both market monitors make recommendations in their annual markets reports to enhance the markets, and the ISO is already working with its stakeholders on many of those enhancements and will review the other recommendations,” the spokesperson said.
Potomac Economics said in its 2011 assessment of the ISO’s electricity markets that energy prices fell 7% from 2010 to 2011, due mainly to reductions in natural gas prices and load levels as well as increases in surplus capacity in the real-time market.
Also, the average load decreased 1% from 2010 to 2011 and 2.5% from the summer of 2010 to the summer of 2011, mainly due to milder weather.
The system generally operated with higher levels of surplus capacity in 2011 than in 2010, Potomac Economics added, noting that the amount of surplus capacity generally increased because a large flexible pump storage generating resource returned to service after being out of service for most of 2010. Furthermore, increased imports from neighboring areas and new generating capacity additions in Connecticut contributed to higher surplus capacity in 2011.
While the day-ahead and real-time markets operated relatively efficiently in 2011, Potomac Economics said it found that real-time prices often do not fully reflect the cost of satisfying demand and maintaining reliability during tight market conditions.
Potomac Economics made recommendations to address the efficiency of real-time prices, including developing pricing changes to allow real-time prices to reflect the costs of fast-start units and operator actions to maintain reliability.
Average real-time energy prices decreased 7% from about $53 per MWh in 2010 to $49 in 2011, mainly due to lower fuel prices, lower load levels, increases in net imports and higher surplus capacity levels, Potomac Economics said.
Transmission upgrades reduced need to commit generation
Upgrades to the transmission system in Connecticut and southeast Massachusetts, completed by mid-2009, reduced the need for the ISO to commit generation for local reliability.
Consequently, Potomac Economics added, the total uplift charges from net commitment period compensation payments fell from $387m in 2008 to $71m in 2011.
New England has experienced little congestion into historically constrained areas, including Boston, Connecticut and lower southeast Massachusetts, since transmission upgrades were completed in 2009. In 2011, most of the price separation between net exporting regions and net importing regions was due to transmission losses, rather than to transmission congestion.
Total day-ahead congestion revenues totaled $18m in 2011, down from $38m in 2010, due primarily to load levels decreasing and reducing the frequency of congestion into import-constrained areas, and lower natural gas prices reducing costs of offering generators’ dispatch levels to manage the flow over a constraint and the associated congestion-related price differences, Potomac Economics added.
The recent levels of congestion revenue are below the level that prevailed before transmission upgrades were completed in 2009. Potomac Economics also said that given the relatively small congestion price differences between net-importing regions and net-exporting regions, future investment in new resources is most likely to happen in areas where it is less costly to build and operate resources until generation retirements and/or load growth change the pattern of network flows.
Potomac Economics further noted that the ISO uses most of the congestion revenues to fund the economic property rights to the transmissions system in the form of financial transmission rights (FTRs), which allow participants to hedge the congestion costs associated with delivering power to a location that is constrained by the limits of the transmission network.
Since FTR auctions are forward financial markets, efficient FTR prices should reflect the expectations of market participants regarding congestion in the day-ahead market.
Potomac Economics also said it found that in 2011, annual FTR prices generally over-estimated the congestion that prevailed in the energy market. Monthly FTR prices were more consistent with congestion patterns, which is to be expected due to additional information that becomes available regarding system conditions.
Potomac Economics also found that the consistency of FTR prices and congestion improved substantially overall in 2010 and 2011 from prior years. “[W]e conclude that the FTR markets performed reasonably well in 2011,” Potomac Economics added.
The congestion revenue of $18m collected by the ISO in 2011 was enough to fully fund the target value of the FTRs.
Potomac Economics also said supplemental commitment for local reliability has been low in the past two years because the transmission upgrades in historically import-constrained areas completed in 2009 allow additional imports to those areas and reduce the amount of online and quick-start capacity that must be available internally. In 2011, the amount of capacity committed for most local reliability issues averaged 90 MW, down from 1,000 MW in 2008.
While recent transmission upgrades have reduced the need for the ISO to commit generation to satisfy local reliability requirements since July 2009, the ISO still needs to make supplemental commitments periodically to satisfy the region’s system-wide reliability requirements. “Our evaluation indicates that supplemental commitments to meet the system-wide capacity needs increased from under 100 MW before 2009 to an average of more than 400 MW in 2010 and 2011,” Potomac Economics added.
Among other things, Potomac Economics said that roughly 42% of the capacity that was supplementally committed in 2011 was needed to maintain system level reserves in retrospect, which is not surprising since resource commitments are “lumpy.”
Furthermore, the lack of fast-start resources in New England leads the ISO in some cases to rely on slower-starting units that must be notified in advance of the operating hour when uncertainty is high, Potomac Economics said.