New England’s wholesale electricity markets continued to produce competitive results in 2010, according to a report released by the internal market monitor of ISO New England Inc., the operator of the region’s bulk power system and wholesale electricity markets.

The 2010 Annual Markets Report concluded that factors including higher fuel prices, increased consumer demand, the extended outage of a large resource, and lower hydroelectric production levels contributed to increases in electricity prices over 2009 levels.

“A warmer-than-normal summer, cooler-than-normal winter, and gradual economic recovery resulted in the need to run more expensive units more often last year than in 2009 to help meet peak demand,” said David LaPlante, vice president of market monitoring. “Additionally, the transition to the Forward Capacity Market on June 1, 2010, was successful, as resources purchased through the first Forward Capacity Auction in 2008 enabled the ISO to reliably operate the bulk power system, despite high loads and several system contingencies throughout the year.”

The increase in 2010 wholesale electricity prices follows lower 2009 energy prices that were driven by plummeting fuel costs and decreased demand. Reflecting competitive market fundamentals, 2010 electricity prices were pushed up by higher costs of generation fuels and higher demand. The effect of hot weather and increased economic activity caused demand to increase by 3.1% in 2010, with more expensive oil-fired generation setting the price more frequently.

The 2010 Annual Markets Report examines factors that contribute to the overall cost of wholesale power to determine whether the markets are operating efficiently and competitively. These factors include electric energy prices, fuel costs, consumption levels, transmission congestion, costs to run power plants to maintain system reliability, the market design and system operations.

Highlights of the 2010 Annual Markets Report are as follows:

• Wholesale electricity market value: The all-in price of wholesale electricity, which includes capacity and ancillary service payments as well as energy costs, rose 12%, from about $7.5 billion in 2009 to about $8.5 billion in 2010, reflecting higher fuel prices and increased demand.
• Energy costs: The average real-time Hub price for wholesale electric energy increased from $42.02/megawatt-hour (MWh) to $49.56/MWh.
• Fuel costs: Average prices for all major fuel types increased in 2010: natural gas prices increased by 9%; fuel oil, 30%; and coal, 27%. Actual electric energy prices in 2010 were comparable to prices observed in 2003. After adjusting for changes in fuel prices, average energy prices have remained stable since 2000.
• Consumption: Demand for electricity was 3.1% higher than in 2009. When the year-to-year variations in weather are factored out, annual demand was up by 1.3%.
• Congestion: The costs associated with congestion on transmission lines increased 51% in 2010, from $25 million in 2009 to $38 million. After dropping significantly in 2009 with the completion of transmission upgrades in Boston and Connecticut, congestion costs rose in 2010 as a result of higher seasonal demand that caused congestion to occur more frequently, higher fuel costs, and the unexpected, extended outage of a generating facility.
• Reliability costs: To meet the requirements for ensuring the reliability of New England’s bulk power system, the ISO may commit resources in addition to those cleared in the day-ahead energy market. Reliability costs increased 71%, from $55.7 million in 2009 to $95.5 million in 2010 due to the need to commit relatively high-cost, oil-fired generators to meet the forecasted load and reserve requirements at times of peak demand, as well as the unexpected, extended outage of a generating facility.
• Capacity: The cost of capacity decreased by 9% because the number of megawatts receiving capacity payments declined with the start of the Forward Capacity Market in 2010.
• Reserve prices: Total real-time reserve payments in 2010 were $18.7 million, an increase from $7.9 million in 2009. The large increase in 2010 payments was due in part to the unexpected, extended outage of a large resource and higher load levels during the summer.
• Demand resources: The transition to the Forward Capacity Market (FCM) on June 1, 2010, brought several changes to the ISO demand-response programs. Four programs or asset categories were retired, four new resource types were introduced, and the Real-Time Price-Response program and the Day-Ahead Load Response Program were extended. Overall, the megawatts of demand resources participating in ISO markets declined as previous programs transitioned to the new FCM market.
• Generator availability: The amount of time generators were available to produce electricity has slightly increased for the third consecutive year: in 2010, aggregate performance was at 88%; in 2009, 87%, and 2008, 86%.

The ISO relies on two independent market monitors: an Internal Market Monitor and an External Market Monitor. Every year, the market monitors review and report on market results and offer insights into the markets’ competitiveness and efficiency as well as areas of market design and operations that need enhancement or improvement.

The internal market monitor reports directly to ISO New England’s Board of Directors, giving the monitoring function the independence needed to objectively perform its functions. This annual report is submitted simultaneously to the ISO and the Federal Energy Regulatory Commission, which is charged with ensuring that markets within its jurisdiction are free of design flaws and inappropriate market behavior.