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Locational Marginal Pricing Basics for Restructured Wholesale Power Markets

Author

Listed:
  • Liu, Haifeng
  • Tesfatsion, Leigh
  • Chowdhury, A.A.

Abstract

Although Locational Marginal Pricing (LMP) plays an important role in many restructured wholesale power markets, the detailed derivation of LMPs as actually used in industry practice is not readily available. This lack of transparency greatly hinders the efforts of researchers to evaluate the performance of these markets. In this paper, different AC and DC optimal power flow (OPF) models are presented to help understand the derivation of LMPs. As a byproduct of this analysis, the paper provides a rigorous explanation of the basic LMP and LMP-decomposition formulas (neglecting real power losses) presented without derivation in the business practice manuals of the U.S. Midwest Independent System Operator (MISO).

Suggested Citation

  • Liu, Haifeng & Tesfatsion, Leigh & Chowdhury, A.A., 2009. "Locational Marginal Pricing Basics for Restructured Wholesale Power Markets," ISU General Staff Papers 200901010800001031, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:200901010800001031
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    Cited by:

    1. Yang, Zhifang & Zhong, Haiwang & Lin, Wei & Lin, Jeremy & Chen, Yonghong & Xia, Qing & Liu, Wentao & Zhang, Xuan, 2019. "Mapping between transmission constraint penalty factor and OPF solution in electricity markets: analysis and fast calculation," Energy, Elsevier, vol. 168(C), pages 1181-1191.
    2. Lyden, Andrew & Alene, Samuel & Connor, Peter & Renaldi, Renaldi & Watson, Stephen, 2024. "Impact of locational pricing on the roll out of heat pumps in the UK," Energy Policy, Elsevier, vol. 187(C).
    3. Tianyu Cui & Francesco Caravelli & Cozmin Ududec, 2017. "Correlations and Clustering in Wholesale Electricity Markets," Papers 1710.11184, arXiv.org, revised Nov 2017.
    4. Luca Lena Jansen & Georg Thomaßen & Georgios Antonopoulos & Ľuboš Buzna, 2022. "An Efficient Framework to Estimate the State of Charge Profiles of Hydro Units for Large-Scale Zonal and Nodal Pricing Models," Energies, MDPI, vol. 15(12), pages 1-23, June.
    5. Tiago Pinto & Mohammad Ali Fotouhi Ghazvini & Joao Soares & Ricardo Faia & Juan Manuel Corchado & Rui Castro & Zita Vale, 2018. "Decision Support for Negotiations among Microgrids Using a Multiagent Architecture," Energies, MDPI, vol. 11(10), pages 1-20, September.
    6. Dowling, Alexander W. & Kumar, Ranjeet & Zavala, Victor M., 2017. "A multi-scale optimization framework for electricity market participation," Applied Energy, Elsevier, vol. 190(C), pages 147-164.
    7. Brooks, Adria E. & Lesieutre, Bernard C., 2022. "A locational marginal price for frequency balancing operations in regulation markets," Applied Energy, Elsevier, vol. 308(C).
    8. Selcuk, O. & Acar, B. & Dastan, S.A., 2022. "System integration costs of wind and hydropower generations in Turkey," Renewable and Sustainable Energy Reviews, Elsevier, vol. 156(C).
    9. Juan Ospina & David M. Fobes & Russell Bent, 2023. "On the Feasibility of Market Manipulation and Energy Storage Arbitrage via Load-Altering Attacks," Energies, MDPI, vol. 16(4), pages 1-16, February.
    10. Tsai, Chen-Hao & Eryilmaz, Derya, 2018. "Effect of wind generation on ERCOT nodal prices," Energy Economics, Elsevier, vol. 76(C), pages 21-33.
    11. Jan-Philipp Sasse & Evelina Trutnevyte, 2023. "A low-carbon electricity sector in Europe risks sustaining regional inequalities in benefits and vulnerabilities," Nature Communications, Nature, vol. 14(1), pages 1-15, December.

    More about this item

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D6 - Microeconomics - - Welfare Economics
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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