Department of Market Monitoring – California ISO April 2010 ACKNOWLEDGEMENT The following staff members of the Department of Market Monitoring contributed to this report: Eric Hildebrandt Jeffrey McDonald Brad Cooper Bryan Swann Dan Yang David Robinson Douglas Bergman Kallie Wells Kimberli Lua Lin Xu Mariam Zarrabi Pearl O’Connor Ryan Kurlinski Annual Report on Market Issues and Performance Department of Market Monitoring – California ISO April 2010 TABLE OF CONTENTS Executive Summary ...................................................................................................................... 1 Overall market performance ............................................................................................................................. 1 Energy markets .................................................................................................................................................. 5 Price convergence ......................................................................................................................................... 5 Hour-ahead scheduling process......................................................................................................................... 7 Exceptional dispatch .......................................................................................................................................... 8 Market power mitigation ................................................................................................................................. 10 Ancillary services ............................................................................................................................................. 13 Residual unit commitment .............................................................................................................................. 14 Resource adequacy program ........................................................................................................................... 15 Investment in new generation ......................................................................................................................... 16 Recommendations ........................................................................................................................................... 17 Short-term market improvements .............................................................................................................. 17 New design initiatives ................................................................................................................................. 18 Market power mitigation ............................................................................................................................ 20 Resource adequacy program ........................................................................................................................... 22 1 Overview of California’s wholesale electricity markets ...................................................... 1.1 1.1 Locational marginal pricing ................................................................................................................... 1.1 1.2 Day-ahead market ................................................................................................................................ 1.3 1.3 Residual unit commitment ................................................................................................................... 1.4 1.4 Hour-ahead scheduling process ............................................................................................................ 1.5 1.5 Real-time dispatch ................................................................................................................................ 1.6 1.6 Local market power mitigation ............................................................................................................. 1.7 1.7 Resource adequacy program ................................................................................................................ 1.8 1.8 Future design enhancements ............................................................................................................. 1.10 2 Load and supply conditions .............................................................................................. 2.1 2.1 Load conditions ..................................................................................................................................... 2.1 2.1.1 System loads ................................................................................................................................ 2.1 2.1.2 Local transmission constrained areas .......................................................................................... 2.4 2.1.3 Demand response......................................................................................................................... 2.7 2.2 Supply conditions ................................................................................................................................ 2.10 2.2.1 Generation mix ........................................................................................................................... 2.10 2.2.2 Natural gas prices ...................................................................................................................... 2.15 2.2.3 Generation outages.................................................................................................................... 2.17 2.2.4 Generation addition and retirement .......................................................................................... 2.17 2.3 Net market revenues for typical new gas-fired generation ................................................................ 2.21 3 Energy market performance ............................................................................................. 3.1 3.1 Total wholesale market costs ............................................................................................................... 3.1 3.2 Day-ahead scheduling ........................................................................................................................... 3.5 3.3 Market prices ...................................................................................................................................... 3.11 3.3.1 Price convergence ...................................................................................................................... 3.11 3.3.2 Locational prices ........................................................................................................................ 3.14 3.4 Price volatility ..................................................................................................................................... 3.18 3.5 Exceptional dispatch ........................................................................................................................... 3.22 3.6 Residual unit commitment ................................................................................................................. 3.28 Annual Report on Market Issues and Performance i Department of Market Monitoring – California ISO April 2010 3.7 Bid cost recovery payments ................................................................................................................ 3.34 3.8 Follow-up on prior recommendations ................................................................................................ 3.35 4 Energy market competitiveness and mitigation ................................................................. 4.1 4.1 Market power mitigation ...................................................................................................................... 4.2 4.1.1 Bid mitigation inputs .................................................................................................................... 4.2 4.1.2 Bid mitigation process .................................................................................................................. 4.3 4.2 Competitiveness benchmark ................................................................................................................ 4.4 4.3 Bid caps and market price caps ............................................................................................................ 4.7 4.4 Local market power mitigation ............................................................................................................. 4.9 4.4.1 Frequency and impact of bid mitigation .................................................................................... 4.11 4.4.2 Mitigation of exceptional dispatches ......................................................................................... 4.15 4.4.3 Default energy bids .................................................................................................................... 4.17 4.4.4 Frequently mitigated unit bid adder .......................................................................................... 4.20 4.4.5 Start-up and minimum load bids ................................................................................................ 4.24 4.4.6 Competitiveness of transmission constraints ............................................................................. 4.29 5 Congestion management .................................................................................................. 5.1 5.1 Summary 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