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Derivation of Locational Marginal Prices for Restructured Wholesale Power Markets

  • Liu, Haifeng
  • Tesfatsion, Leigh S.
  • Chowdhury, A.A.

Although Locational Marginal Pricing (LMP) plays an important role in many restructured wholesale power markets, the detailed derivation of LMPs as actually used in industry practice is not readily available. This lack of transparency greatly hinders the efforts of researchers to evaluate the performance of these markets. In this paper, different AC and DC optimal power flow (OPF) models are presented to help understand the derivation of LMPs. As a byproduct of this analysis, we are able to provide a rigorous explanation of the basic LMP and LMP-decomposition formulas (neglecting real power losses) presented without derivation in the business practice manuals of the U.S. Midwest Independent System Operator (MISO).

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 13068.

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Date of creation: 03 Jun 2009
Date of revision:
Publication status: Published in Journal of Energy Markets 2009, vol. 2 no. 1, pp. 3-27
Handle: RePEc:isu:genres:13068
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