🔥 Why Can LMP at Some Locations Exceed the Most Expensive Unit’s Price?

💡 Ever wondered why electricity prices at some locations spike beyond the cost of the most expensive generator?

Let’s break it down with an intuitive example!

⚡ Understanding Locational Marginal Pricing (LMP)

In the U.S. electricity wholesale market, prices at each bus are determined by Locational Marginal Pricing (LMP)—the cost of supplying an additional unit of electricity at a specific location.

• Consumers pay the LMP at their locations.
• Generators get paid based on the LMP at their connection points.

Under normal conditions, LMP is set by the most expensive unit needed to meet demand. However, when transmission congestion occurs, LMP at some locations can exceed even the priciest generator’s cost!

🔎 A Simple 3-Bus Example: Why Does LMP Spike?

System Setup:

transmission_lines = {
    "B1-B3": {"impedance": 0.3, "limit": 50},
    "B1-B2": {"impedance": 0.1},
    "B2-B3": {"impedance": 0.2}
}

generators = {
    "G1": {"bus": "B1", "cost": 10, "Pmax": 200},
    "G2": {"bus": "B2", "cost": 30, "Pmax": 200}
}

load = {"B3": 100}  # MW

G1 will have power output of 100 MW, 50 MW on Line B1-B3, 50 MW on Lines B1-B2-B3. Line B1-B3 will be on its limit.

🚀 What Happens When We Add 1 MW Load at B3?

added_load = 1  # MW
G2_increase = 3  # MW
G1_decrease = 2  # MW

# Compute LMP at B3
lmp_b3 = (G2_increase * generators["G2"]["cost"]) - (G1_decrease * generators["G1"]["cost"])
print(f"LMP at B3: ${lmp_b3}/MWh")

Output:

LMP at B3: $70/MWh

⚠️ Due to congestion, the system is forced to dispatch more than the load increment from the most expensive unit and reduce the output of a cheap unit, driving LMP far beyond the highest generator’s cost!

🔄 How Can We Reduce LMP Spikes?

If we could reroute power flows by opening the B1-B3 line, all power would flow through B1-B2-B3 without congestion, bringing LMP at B3 down to just $10/MWh!

🔑 Key Takeaways

✅ Congestion forces costly redispatch, pushing LMP beyond the priciest generator.
✅ Transmission constraints dictate power flows, sometimes leading to inefficient pricing.
✅ Investing in grid capacity can help reduce congestion and stabilize market prices.

🚀 Understanding these pricing dynamics is essential for grid operators, market participants, and policymakers aiming for an efficient and resilient electricity market.

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