Locational Marginal Pricing: A Fundamental Reconsideration
This study establishes that Locational Marginal Pricing (LMP) is conceptually problematic for grid-supported centrally-managed wholesale power markets transitioning to decarbonized grid operations with increasingly diverse participants, hence with increasingly uncertain and volatile net loads. LMP a...
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Published in | IEEE open access journal of power and energy Vol. 11; pp. 104 - 116 |
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Format | Journal Article |
Language | English |
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New York
IEEE
2024
The Institute of Electrical and Electronics Engineers, Inc. (IEEE) |
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Abstract | This study establishes that Locational Marginal Pricing (LMP) is conceptually problematic for grid-supported centrally-managed wholesale power markets transitioning to decarbonized grid operations with increasingly diverse participants, hence with increasingly uncertain and volatile net loads. LMP assigns a common per-unit price LMP(b,T) (<inline-formula> <tex-math notation="LaTeX">{\}</tex-math></inline-formula>/MWh) to each next unit (MWh) of grid-delivered energy, conditional on delivery location b and delivery period T. However, this entails a serious many-to-one benefit/cost measurement error: namely, the valuation of this next unit by a market participant or system operator will typically depend strongly on the dynamic attributes of the path of power injections and/or withdrawals (MW) used to implement its delivery at b during T. One option is to muddle through, forcing market participants and system operators to express benefit/cost valuations for next units of grid-delivered energy in per-unit form without regard for the true benefits and costs of flexible power delivery. Another option, advocated in this study, is to explore conceptually-coherent nodal multi-interval pricing mechanisms permitting grids to function efficiently as flexibility-support insurance mechanisms, i.e., as mechanisms enabling just-in-time nodal power deliveries to meet just-in-time nodal power demands as well as system reliability requirements. |
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AbstractList | This study establishes that Locational Marginal Pricing (LMP) is conceptually problematic for grid-supported centrally-managed wholesale power markets transitioning to decarbonized grid operations with increasingly diverse participants, hence with increasingly uncertain and volatile net loads. LMP assigns a common per-unit price LMP(b,T) ( <tex-math notation="LaTeX">${\$}$</tex-math>/MWh) to each next unit (MWh) of grid-delivered energy, conditional on delivery location b and delivery period T. However, this entails a serious many-to-one benefit/cost measurement error: namely, the valuation of this next unit by a market participant or system operator will typically depend strongly on the dynamic attributes of the path of power injections and/or withdrawals (MW) used to implement its delivery at b during T. One option is to muddle through, forcing market participants and system operators to express benefit/cost valuations for next units of grid-delivered energy in per-unit form without regard for the true benefits and costs of flexible power delivery. Another option, advocated in this study, is to explore conceptually-coherent nodal multi-interval pricing mechanisms permitting grids to function efficiently as flexibility-support insurance mechanisms, i.e., as mechanisms enabling just-in-time nodal power deliveries to meet just-in-time nodal power demands as well as system reliability requirements. This study establishes that Locational Marginal Pricing (LMP) is conceptually problematic for grid-supported centrally-managed wholesale power markets transitioning to decarbonized grid operations with increasingly diverse participants, hence with increasingly uncertain and volatile net loads. LMP assigns a common per-unit price LMP(b,T) (<inline-formula> <tex-math notation="LaTeX">{\}</tex-math></inline-formula>/MWh) to each next unit (MWh) of grid-delivered energy, conditional on delivery location b and delivery period T. However, this entails a serious many-to-one benefit/cost measurement error: namely, the valuation of this next unit by a market participant or system operator will typically depend strongly on the dynamic attributes of the path of power injections and/or withdrawals (MW) used to implement its delivery at b during T. One option is to muddle through, forcing market participants and system operators to express benefit/cost valuations for next units of grid-delivered energy in per-unit form without regard for the true benefits and costs of flexible power delivery. Another option, advocated in this study, is to explore conceptually-coherent nodal multi-interval pricing mechanisms permitting grids to function efficiently as flexibility-support insurance mechanisms, i.e., as mechanisms enabling just-in-time nodal power deliveries to meet just-in-time nodal power demands as well as system reliability requirements. This study establishes that Locational Marginal Pricing (LMP) is conceptually problematic for grid-supported centrally-managed wholesale power markets transitioning to decarbonized grid operations with increasingly diverse participants, hence with increasingly uncertain and volatile net loads. LMP assigns a common per-unit price LMP(b,T) ([Formula Omitted]/MWh) to each next unit (MWh) of grid-delivered energy, conditional on delivery location b and delivery period T. However, this entails a serious many-to-one benefit/cost measurement error: namely, the valuation of this next unit by a market participant or system operator will typically depend strongly on the dynamic attributes of the path of power injections and/or withdrawals (MW) used to implement its delivery at b during T. One option is to muddle through, forcing market participants and system operators to express benefit/cost valuations for next units of grid-delivered energy in per-unit form without regard for the true benefits and costs of flexible power delivery. Another option, advocated in this study, is to explore conceptually-coherent nodal multi-interval pricing mechanisms permitting grids to function efficiently as flexibility-support insurance mechanisms, i.e., as mechanisms enabling just-in-time nodal power deliveries to meet just-in-time nodal power demands as well as system reliability requirements. |
Author | Tesfatsion, Leigh |
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References | ref12 Tesfatsion (ref1) 2024 ref15 ref14 ref20 (ref3) 2022 ref17 ref16 ref19 ref18 ref8 ref7 Eldridge (ref9) 2018 Ela (ref11) 2018 ref4 ref6 ref5 Tesfatsion (ref2) 2023 (ref13) 2003 Feng (ref10) |
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SubjectTerms | Costs Dams Energy measurement Error analysis grid-supported power markets as flexibility-support insurance mechanisms Just in time Locational marginal pricing many-to-one benefit/cost measurement error Marginal pricing nodal multi-interval pricing mechanisms Operators (mathematics) Optimization Power markets Pricing Schedules System reliability US RTO/ISO-managed wholesale power markets volumetric grid risk |
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Title | Locational Marginal Pricing: A Fundamental Reconsideration |
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