New England electricity markets operated competitively and relatively efficiently in 2011, according to a report filed with federal regulators earlier this week. The 2011 Assessment of the ISO New England Electricity Markets (184-page PDF), prepared by New England's external market monitor, reports on how the market performed last year, with a focus on evaluating efficiency and competitiveness.
ISO New England Inc. is the regional transmission organization covering most of New England. In this role, ISO New England performs three major functions: overseeing operation of New England's bulk power generation and transmission system, administering the region's wholesale electricity markets, and managing regional planning processes. ISO New England is regulated by the Federal Energy Regulatory Commission, and has both internal and external market monitors who review its performance. The internal market monitor is a unit within ISO New England Inc., while the external market monitor is an independent outside consultant. Potomac Economics currently serves as the external market monitor.
Potomac's report found that "the markets performed competitively in 2011". One piece of evidence Potomac used to support this finding is that average energy prices fell 7 percent from 2010 to 2011 (from approximately $53 per MWh in 2010 to $49 in 2011). According to the report, this is due in large part to a decrease in the average price of natural gas. In Potomac's view, lower fuel costs translate to lower prices in a well-functioning, competitive market because fuel costs constitute the vast majority of the marginal costs of most generation. Natural gas pricing decreases were not the only contributor to lower energy prices, according to the report; Potomac also noted that prices fell due to a weather-driven decrease in demand for electricity, stating that, "Average load decreased 1 percent from 2010 to 2011 and 2.5 percent from the summer of 2010 to the summer of 2011, primarily due to milder weather."
Potomac also found that "both the day-ahead and real-time markets operated relatively efficiently in 2011 as prices appropriately reflected the effects of lower fuel prices and load levels." However, the external market monitor found that "real-time prices often do not fully reflect the cost of satisfying demand and maintaining reliability during tight market conditions, particularly when fast-start resources or demand response resources are deployed in the real-time market." As a result, the report recommended a series of changes to the New England markets, including developing pricing changes to allow the actual costs of demand response and fast-start resources to be reflected in prices.
The report was filed with the Federal Energy Regulatory Commission on June 25. It complements the 2011 Annual Markets Report (121-page PDF), released this May by ISO New England's internal market monitor. The internal market monitor's report similarly found that the markets operated competitively in 2011.