Locational Marginal Pricing
Locational Marginal Pricing (LMP) is a market pricing approach used to manage efficient use of the transmission system when congestion occurs on the bulk power grid. LMP provides a method of identifying where congestion occurs on the system and assigns the cost of that congestion to those locations.
Under LMP, the marginal cost of electricity is calculated at locations on the New England transmission system. These prices include the cost of congestion and therefore reflect the true cost of delivering and supplying electricity at every location on the grid.
Because LMP creates price signals that reflect the locational value of electricity, participants can readily determine areas of congestion and see the value of investing in generation, transmission and demand response programs. Actions taken by market participants in response to these signals could reduce or alleviate constraints on the system, increase competition and further improve the reliable supply of electricity in New England.
To simplify trading under SMD, the New England transmission system is also divided into eight pricing zones and a hub. The LMP for each zone is the load weighted average of each of the nodal LMPs that make up the zone. The LMP for the hub is the simple average LMP from each of the LMP nodes that make up the hub.
The Multi-Settlement System
The term multi-settlement describes the energy market under SMD. The energy market consists of day-ahead and real-time markets for electricity, each producing its own separate and unique financial settlement. The first settlement relates to the day-ahead market's costs and payments while the second settles the difference between energy scheduled day-ahead and that which is actually delivered in real-time.
The multi-settlement system allows market participants to secure day-ahead prices and reduce their vulnerability to price fluctuations that can occur in the real-time market. The day-ahead market is therefore a hedge against real-time price volatility. What's more, day-ahead price signals influence correct, economic real-time behavior-they produce greater certainty of generator performance and exert a powerful incentive for wholesale users to understand and manage their patterns of consumption.
Further, participants are provided with a broader range of options for participating in both the day-ahead and real-time markets. By expanding the horizon for energy transactions, the market becomes more liquid, more competitive, and more economically efficient.
Opportunities and incentives for participants to manipulate the market are limited. Finally, wholesale demand is a full and equal participant in the determination of prices, which provides a market-based means of balancing supply and demand on the system.
