Definition: Locational Marginal Price
Cost to serve the next MW of load at a specific location,
using the lowest production cost of all available generation,
while observing all transmission limits
Notes:
- This is the equation for Locational Marginal Price or LMP. The cost of marginal losses (the last “box”) is not currently included in the PJM implementation of LMP. So, LMP is the cost to serve the next MW of load at a specific location, using the lowest production cost of all available generation, while observing all transmission limits.
- LMP is a pricing approach that addresses congestion costs, by reflecting the cost of re-dispatch for out-of-merit generation and the cost of delivering energy to the location. (Cheaper generation may not be fully loaded, if there is a transmission constraint.) Using this pricing mechanism, buyers and sellers experience the actual cost to deliver energy at their location on the transmission system. Therefore, LMP encourages the efficient use of the transmission system by assigning costs to users based on the way energy is actually delivered.
- Taking into account the physical aspects of the transmission system separates LMP from MCP and zonal pricing methods. Remember, MCP is the marginal cost to serve the energy demand, ignoring transmission limitations. So, the MCP is the same at every location within PJM. MCP does not include transmission congestion costs.