Locational Marginal Pricing in North American Power Systems

Abstract:
The methodology used in the pricing of electrical energy is a fundamental characteristic of electricity market design. In deregulated North American power systems the utilization of locational marginal pricing is the dominant approach to pricing electrical energy. Locational marginal prices (LMPs), which are spatially and temporally distinguished nodal prices based upon short-run marginal costs, reflect economic and physical realities of the power system as well as operating constraints. In addition, LMPs can be used to ascertain transmission congestion costs and are often included in ancillary service market clearing or settlement calculations. It is therefore requisite to understand the fundamentals of LMPs to be able to analyze deregulated North American power system economics. In this paper, the concept, calculation, utilization and practical application of LMPs as well as a thorough educational illustration are provided.