Locational Marginal Price

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The locational marginal price (LMP) at some particular point in the grid measures the marginal cost of delivering an additional unit of electric energy (i.e., a marginal MWh) to that location. Figure 6.9: Two-node network. This web-based only course provides an entry-level understanding of the concept of Locational Marginal Prices that are at the core of ERCOT price formation. This course is a pre-requisite for several follow-on courses. RTOs use locational marginal pricing (LMP). Prices are determined at thousands of locations. Prices are also determined hourly and on a 5-minute basis. Technical and economic factors lead power plant operators to run generators even when power supply outstrips demand.

What Is 'Locational Marginal Price'?

Outside of the U.S., locational marginal pricing has been used in New Zealand for more than 20 years, and versions of locational pricing have been used in Chile and Norway for many years. The formal definition is that the Locational Marginal Price (LMP) at some node k in the network is the marginal cost to the RTO of delivering an additional unit of energy to node k. Relatedly, we sometimes define the 'transmission price' or 'congestion cost' between two nodes j and k in the network as the difference in LMPs between the two nodes.

The 'Locational Marginal Price' (“LMP”) is a market-pricing approach used to manage the efficient use of the transmission system when congestion occurs on the bulk power grid. The Federal Energy Regulatory Commission (FERC) has proposed Locational Marginal Price as a way to achieve short- and long-term efficiency in wholesale electricity markets.

Marginal pricing is the idea that the market price of any commodity should be the cost of bringing the last unit of that commodity – the one that balances supply and demand – to market. LMP recognizes that this marginal price may vary at different times and locations based on transmission congestion. With Locational Marginal Price, market participants can view the price at hundreds of locations in the system.

Electric grid congestion develops when one or more restrictions on the transmission system prevent the economic, or least expensive, supply of energy from serving the demand. For example, transmission lines may not have enough capacity to carry all the electricity demand required to meet the demand at a specific location. This is called a “transmission constraint.” Locational Marginal Price includes the cost of supplying the more expensive electricity in those locations, thus providing a precise, market-based method for pricing energy that includes the “cost of congestion.”

LMP provides market participants (power companies) a clear and accurate signal of the price of electricity at every location on the grid. These prices, in turn, reveal the value of locating new generation, upgrading transmission, or reducing electricity consumption—elements needed in a well-functioning market to alleviate constraints, increase competition and improve the systems’ ability to meet power demand.

Locational Marginal Price Wiki

Read More on LMPs at: http://cogeneration.net/locational-marginal-pricing

'Real Time' LMPs are available in the midwest through MISO, or Midwest Independent System Operator, at www.midwestiso.org.

LMPs, or Locational Marginal Prices, are a useful proxy for real-time emissions because are calculated at hundreds of points in the electric grid, and are available as historic, real-time, and day-ahead projected values.

LMPs take into account

(1) the cost of fuel to generate electricity,

(2) the constraint in the grid (constraint is limited by the electrical capacity of transmission lines

Marginal

(3) power losses in the system.

When demand for electricity rises in a particular place, Locational Marginal Prices also rise, and that means more expensive fuel types are used to supply the extra electricity needed. Similarly, when LMPs are low, cheap or baseline fuel sources, either coal or even nuclear or renewable power, are supplying the next incremental amount of electricity. LMPs are reported in near real-time five minutes increments and are publicly available through MISO, the Midwest Independent System Operator (www.midwestiso.org).

Marginal Generating Fuel Type

The marginal unit is the generator that will be affected by the next incremental change in electricity. The marginal unit changes throughout the day as different generators are turned on and off to meet system demand. Our model estimates the fuel type of the marginal generator.

For instance, distillate fuel oil (DFO) is a relatively expensive fuel, and generators that burn DFO are typically turned on only when demand is high. If the marginal generator's fuel type is DFO, and demand drops, this is the generator that will be turned down. When demand drops significantly, the DFO generators will be the first to get shut down, leaving the next cheaper fuel type, such as natural gas, as the new marginal generator fuel type.

Real-Time Emissions

We aim to determine the real-time air emissions from electric generation. Specifically, the GLPF project goal is to quantify the amount of emissions that can be reduced by shifting pumping patterns in a water distribution system spatially and temporally.

Using available data on reported air emissions, we can calculate the average air emissions for various pollutants based on the regional mix of fuel types providing generation. Then, once the characteristic emissions profile for each type of fuel has been determined, we can use our estimated marginal fuel type at any given time and location to determine the instantaneous emissions rate in lbs pollutant per kW electricity.

Estimating Real-Time Emissions

How does the timing of electricity use affect the resulting air emissions? What about the location of energy use? In a water distribution network, does it matter when and where pumping occurs?

To answer these questions, the team needed to find a way to estimate the real-time air emissions from electric generation.

Specifically, the GLPF project goal is to quantify the amount of emissions that can be reduced by shifting pumping patterns spatially and temporally in water distribution systems.

“Locational Marginal Pricing” is a one-day interactive seminar that explains nodal pricing in electric power markets for legal, regulatory, and accounting professionals.

You learn the basics of:

  • marginal clearing prices in an offer-based economic dispatch market
  • transmission constraints
  • hedging of energy and transmission price variation
  • market power

(For a technical overview of Locational Marginal Pricing, read the syllabus for my UT grad course.)

“You made a very complicated subject much easier to analyze and understand. A great course!”

Prerequisites: General knowledge of electricity markets. No math or technical prerequisites.

Format: Seven lecture hours illustrated with 200 slides. Interactive exercises.

Documentation: You receive a three-ring binder of the entire seminar plus a cross-referenced glossary of terms.

Customization: This seminar can be presented on-site at your company.

Instructor: Dr. Ross Baldick, Professor of Electrical and Computer Engineering at The University of Texas at Austin.

Questions? Email Dr. Baldick

“Locational Marginal Pricing” has been presented at:

  • ERCOT
  • Dynegy
  • Austin Energy
  • Lower Colorado River Authority (LCRA)

“One of the best professional educational seminars I have attended. Dr. Baldick builds on concepts from the ground up, in a clear and comprehensible manner. He engages attendees in discussion and responds thoughtfully to all questions.”

Questions? Email Dr. Baldick

Curriculum:

1. Offer-based economic dispatch

  • Block prices for energy offers
  • Demand and demand bids
  • Dispatch and pricing
    • Two generator example
    • Three generator example
  • Incentives from pricing rule
  • Variations

Locational Marginal Price Definition

2. Hedging energy price risk

  • Financial versus physical bilaterals
  • Contracts for differences to hedge price variation

Caiso Locational Marginal Price

3. Transmission

  • Transmission constraints
    • One line example
    • Three generator, four line example
  • Locational marginal pricing (LMP)
  • Congestion rental and congestion cost
  • Properties of LMPs
  • Commercial network model
  • Losses

4. Hedging transmission price risk

  • Variation of LMPs
  • Financial Transmission Rights (FTRs)
    • One line example
    • In combination with CfDs
  • Acquiring FTRs
  • Revenue adequacy
  • Flowgate rights
  • Option FTRs

5. Conclusion

Price
  • Virtual bidding
  • Market power
  • Market power mitigation

Questions? Email Dr. Baldick