The Energy Market operates much like a stock exchange, with market participants establishing a price for electricity by matching supply and demand. Some deregulated markets, most notably in the PJM ISO, ERCOT, New York ISO, and New England ISO markets in the USA use locational marginal pricing that reflects the value of the energy at the specific location and time it is delivered.
Ideally, if the lowest-priced electricity can reach all locations, prices are the same across the grid. However, when there is transmission congestion, energy cannot flow freely to certain locations. In that case, more expensive electricity is ordered to meet that demand. As a result, the locational marginal price (LMP) is higher in those locations.
Locational Marginal Price (LMP) is defined as the marginal price for energy at the location where the energy is delivered or received. For accounting purposes, LMP is expressed in dollars per megawatt-hour ($/MWh). LMP is a pricing approach that addresses Transmission System congestion and loss costs, as well as energy costs. Therefore, each spot market energy customer pays an energy price that includes the full marginal cost of delivering an increment of energy to the purchaser‘s location.
In simple terms (the actual computation of LMP is more complicated):
LMP = Generation Marginal Cost + Transmission Congestion Cost + Cost of Losses
- PJM Manual 11: Energy & Ancillary Services Market Operations Revision: 50; 2012
Dynamics of LMPThe following are a couple of interesting charts that I created from weighted-average day-ahead LMP data in PJM's operating area. The purpose of the chart is to visualize the variation of representative electricity wholesale market price by hour of the day (daily peaks) and by the month (seasonal pricing), to get better insights into wholesale energy market dynamics. (The horizontal axis for the charts represents the time in 24-hour format.)
Chart 1: LMP movement by hour, by monthNote: Please use the scroll bar at the bottom of the chart to see how the LMP varies by hour and then month, starting with June 2011 up to June 2012 (I have deliberately used a 13 month cycle to show the seasonal peaking that happens in July every year). If you hover the mouse over the bar graphs, you would be able to see the data values associated with those bars.
Chart 2: Seasonal Variation of LMPThe following chart shows the seasonal (by month) variation of LMP in a single view. As you see from the chart, the variation is very drastic during peak power usage (from approximately 2PM to approximately 8PM). Similar to the observation from Chart 1: the highest LMP is during the Summer months and the lowest LMP is around the Spring.
Note: If you hover your mouse over the bars on the chart you would be able to see the variation of LMP over the months as part of the seasonal variation.