The Holy Grail and Locational Marginal Pricing
— Part 2 —
While coats of armor, veils of invisibility, and the Excalibur sword might come in handy to locate the Holy Grail, the electric utility industry uses basic economic theory to establish the methodology of wholesale power prices known as Locational Marginal Pricing (LMP). Regional Transmission Organizations (RTO) exist throughout the United States to monitor the flow and sale of electricity and in the Midwest, the Midcontinent Independent System Operator (MISO) operates the grid and markets that CMPAS public power utilities and affiliates participate.
Expressed on a dollar-per-megawatt hour ($/MWh) basis, the LMP reflects the marginal or least cost dispatch of energy to balance supply and demand at pricing nodes. It is considered the “marginal cost” of bringing the next unit of a commodity, in this case energy, to market. Three cost components determine the price at each node:
- Marginal Energy Component (MEC) – The cost of energy that is the same for the entire grid at a given moment in time.
- Marginal Congestion Component (MCC) – The cost of transmission congestion constraints caused by overloaded power lines.
- Marginal Losses Component (MLC) – The cost of physical energy (heat) loss across transmission conductors.
MISO uses LMP to calculate, settle, and communicate energy prices in day-ahead and real-time markets. Much like it sounds, day-ahead auctions establish the price at each node for every hour of the coming day depending on expected load demand and generation supply. In the real-time market, the economic dispatch of energy occurs every five minutes to re-optimize the generation needed to meet load demand at minimum cost.
The MISO accepts bids from sellers in ascending order based on economic dispatch factors and stops with the last incremental bid needed to supply load demand. In theory, the LMP dispatch model should incentivize construction of new generation or additional transmission facilities when high prices indicate “constrained zones” where more generation or transmission is needed.
As a designated MISO market participant and load-serving entity, the CMPAS team conducts energy scheduling for utilities and stays up to date with the highly mechanized, centrally administered RTO marketplace governed by thousands of pages of complex rules. If your utility seeks operational market support that includes hourly load forecasts, invoice settlements, congestion hedging, tariff recovery, and capacity accreditation, contact CMPAS.
Don't Hesitate to contact our team with any questions you have about LMP!
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