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ISO-NE Market Monitor Warns of Decline in Virtual Transactions

June 6, 2011
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A disproportionately high level of transaction costs may threaten the viability of virtual transactions in the ISO New England Day-Ahead Energy Market, the Internal Market Monitor said in an annual markets report.

Virtual transactions are especially important to retail suppliers looking to serve small loads without taking on excessive risk.

The IMM reported that over the past year, the volume of submitted and cleared virtual supply offers has decreased and the volume of virtual demand bids has stayed relatively flat, despite real-time prices exceeding day-ahead prices on average for the year. The IMM noted that a number of participants have reduced their volume of virtual trading activity or have changed their bidding strategies. The volume of virtual supply offers recovered somewhat in the fourth quarter of 2010, the result of a positive day-ahead premium overall in the quarter.

The IMM found that this behavior is broadly consistent with the following:

- Through the third quarter of 2010, changes in the day-ahead/real-time price relationship to one in which average real-time prices were higher than average day-ahead market prices reduced the opportunities for virtual supply in the day-ahead market. To some extent, this turned around in the fourth quarter of 2010

- The risk associated with taking virtual positions has increased, given, to some extent, the increased volatility of real-time prices and the magnitude and uncertainty of real-time Net Commitment-Period Compensation (NCPC).

- The transaction costs associated with taking virtual positions are high and uncertain. Over the past year, the total allocated NCPC charges have exceeded the total gross profits from the virtual positions.

"Those virtual traders who have remained in the market have added estimates of the per-megawatt-hour allocation of NCPC to their bids and offers. The resulting price spread of several dollars per megawatt-hour effectively limits day-ahead and real-time price convergence (i.e., less supply and demand economically clear the day-ahead market)," the IMM reported.

"During the year, the profitability of virtual positions totaled $14 million. The total allocation of real-time NCPC charges to these positions totaled $22.2 million. Net of real-time transaction costs associated with NCPC, virtual positions realized a total loss of $8.1 million," the IMM added.

"The imposition of this disproportionately high level of transaction costs may threaten the viability of virtual transactions in the Day-Ahead Energy Market, with serious implications for the performance of the market," the IMM warned.

The IMM recommended that the ISO consider revising the market rules so that real-time NCPC charges are not allocated to virtual transactions.

Also of note from the annual markets report is the IMM's conclusion that, "the Forward Capacity Market has not attracted new, in-market generation. Given current surpluses, the fact that new in-market generation has not entered the market is not a problem. However, with the looming possibility that some of the region's older resources retire and some of its nuclear units reach the end of their licenses, the ability of the market to attract timely new in-market generator entry remains largely untested."


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