Node
Under SMD, prices are first calculated at more than 900 locations, called nodes, throughout New England. Nodes represent places on the system where generators inject power into the system or where demand, or load, withdraws from the system. Each pricing node is related to one or more electrical buses on the power grid. A bus is a specific component of the power system at which generators, loads or the transmission system are connected.
These location-specific prices are made up of three components: energy, congestion and losses. The energy component (or marginal cost) is defined as the cost to serve the next increment of demand at the specific location, or node, that can be produced from the least expensive generating unit in the system that still has available capacity.
However, if the transmission network is congested, the next increment of energy cannot be delivered from the least expensive unit on the system because it would cause overloading on the transmission system or violate transmission operating criteria, such as voltage requirements. The congestion component, or transmission congestion cost, is calculated at a node as the difference between the energy component of the price and the cost of providing the additional, more expensive, energy that can be delivered at that location. The congestion component can also be negative in export-constrained areas where there is more generation than demand.
All transmission systems experience electrical losses, which occur as electricity is sent over transmission lines and accounts for a small percentage of electricity from generators. Nodal prices are adjusted to account for the marginal cost of losses.
If the system was entirely unconstrained and there were no losses, all of the LMPs would be equal and would reflect only the energy price. The lowest possible cost generation could flow to all nodes over the transmission system.
Generators are paid nodal LMPs. SMD market rules assure that generators recover their as-offered, or bid-in costs, including start-up and no load costs for all energy generated. If a generator operates "in-merit," most of its compensation will be from the energy market, unless the energy revenues are insufficient to cover its costs.
If higher priced generation is dispatched to relieve congestion, the higher cost for this generation is borne by the location in which it occurs through higher LMPs that those locations must pay. In the original market, these costs are absorbed by all load, or demand, across the New England system, regardless of their areas' contribution to the transmission constraint.
