6.2. ERMUSR 07-11-2006 - Laserfiche WebLink

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Introduction These materials are intended to spur thought and discussion about where MMUA might go as an organization in the future. As always, these materials are not intended to represent a complete inventory of all our activities, nor do they represent an exhaustive list of all the questions we might ask. I hope that these materials will suggest additional questions or lines of inquiry to you. Please feel free to raise items or issues for discussion that are not addressed in the materials. High Wholesale Power Costs A number of disturbing trends have emerged in the last year or two to suggest that the favorable wholesale power deals available to Minnesota municipal utilities for the past 20 to 30 years may be disappearing. Probably the most visible and notorious is the development of the MISO market. Prices under this market are much higher than they were under the old paradigm. A number of factors contribute to this rise in prices: • For much of the last year natural gas prices have been at historic high levels. Since the MISO market price is driven by the highest bid price, high gas costs for combustion turbine generation have driven the whole market sharply upward. As gas prices trend down toward the $5 range, MISO market prices should moderate. • It's a new market, and MISO is still figuring out how to operate it. Hopefully, with experience, MISO will become better at managing the market and eliminating some of the price spikes and volatility. • The market is so focused on real-time prices that it favors high-cost generation that can be brought on and off line in a minute or two. The market undervalues and underutilizes more efficient steam and combined cycle generation that requires significant lead time before coming on line. • The market is intended to produce high prices. It's designed to provide a revenue stream that will encourage mythical investors to develop new generation resources. As long as we retain a market design that pays all generators the market-clearing price regardless of cost, it's hard to foresee a time when market prices come down to traditional levels. The only players likely to step up to the plate to invest in new generation are the existing utilities, and it's to their advantage to maintain fairly tight supplies so prices remain high. Some of these factors are likely to moderate as gas prices come down and MISO gains experience in operating a market. Nonetheless, it seems likely that for the foreseeable future, being a net seller into the MISO market is likely to be a very profitable proposition. Being a net buyer from the MISO market is likely to be a very costly position to be in.