MISO energy markets efficient, capacity markets not: monitor
The Midcontinent Independent System Operator’s energy markets operated competitively and efficiently in 2015, but its capacity market has not provided “efficient economic signals to facilitate investment, retirement and capacity import/export decisions,” MISO’s independent market monitor said Tuesday.
David Patton, president of Potomac Economics, MISO’s IMM, told stakeholders during Tuesday’s Market Subcommittee that the “price-cost markup” for energy was “essentially zero.”
Also, the “output gap,” which measures the potential for economic withholding, averaged 0.11% of load over the year, which is also indicative of a competitive market, Patton said during his presentation about Potomac Economics’ 2015 State of the Market Report. Load was down about 1% year over year, but the number of heating and cooling degree days was up about 5%, Patton said in his written presentation.
“Competition did provide a strong discipline to suppliers, and we do see that suppliers offer prices close to their short-run marginal cost,” Patton said.
Another indication of highly competitive markets is that electricity price movements had a “strong relationship” with natural gas prices, Patton said. Natural gas prices dropped by 50% in 2015, while average real-time electricity prices fell 32% to $27/MWh.
“The cost advantage of coal has been shrinking,” Patton said.
As a consequence, coal-fired generation’s share of the market fell from about 58% in 2014 to about 52% in 2015, while natural gas-fired generation’s share swelled from 17% in 2014 to 23% in 2015.
And natural gas-fired generation has increased its percentage of setting the systemwide marginal price from 59% in 2014 to 76% in 2015, while coal-fired generation’s marginal price percentage plunged from 40% in 2014 to 23% in 2015.
“Even in off-peak hours, natural gas is setting prices more frequently than it has in the past,” Patton said.
Congestion costs dropped from about $2.4 billion in 2014 to about $1.3 billion in 2015, Patton reported.
The falling remuneration to generation from energy sales had no countervailing force in capacity markets, Patton said, reiterating his advocacy for implementing a sloped demand curve that reflects the reliability value of generation.
“When you run an auction where half the market is not represented based on the value it’s providing, you are going to see poor performance, and that’s what we see,” Patton said.
Patton also recommended improving the modeling of transmission constraints within each region and between the North and Central regions and the South region.
MISO’s “extended locational marginal pricing” was another topic in Patton’s discussion of the State of the Market Report.
Formerly known as “convex hull pricing,” the ELMP model includes startup costs in LMPs for fast-start resources and uses offline fast-start resources in price formation under scarcity conditions. It was implemented in March 2015.
The ELMP model has raised the power price an average of 8 cents/MWh, “which is very, very small, versus expectations,” Patton said. Potomac Economics had advocated ELMP for ISO New England, as well, which has resulted in about a $3/MWh increase in prices, he said.
Too few of MISO’s peaking resources were eligible under the ELMP model’s protocols. Therefore, Patton recommended expanding the price-setting eligibility for as much of MISO’s peaking resources as possible.
