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Locational Marginal Pricing Basics for Restructured Wholesale Power Markets


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


In this tutorial paper, different AC and DC optimal power flow (OPF) models are presented to help understand the derivation of Locational Marginal Prices (LMPs) in restructured wholesale power markets. As a byproduct of this analysis, the paper provides 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). Related resources can be accessed at:

Suggested Citation

  • Liu, Haifeng & Tesfatsion, Leigh S. & Chowdhury, A.A., 2009. "Locational Marginal Pricing Basics for Restructured Wholesale Power Markets," Staff General Research Papers Archive 13072, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:13072

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    References listed on IDEAS

    1. Harris, Andrea & Fulton, Murray E., 2000. "Farm Machinery Co-Operatives: An Idea Worth Sharing," Miscellaneous Publications 31762, University of Saskatchewan, Centre for the Study of Co-operatives.
    2. Foreman, Linda F., 2006. "Characteristics and Production Costs of U.S. Corn Farms, 2001," Economic Information Bulletin 7205, United States Department of Agriculture, Economic Research Service.
    3. Sunding, David & Zilberman, David, 2001. "The agricultural innovation process: Research and technology adoption in a changing agricultural sector," Handbook of Agricultural Economics,in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 4, pages 207-261 Elsevier.
    4. Artz, Georgeanne M. & Edwards, William & Olson, Frayne, 2009. "Farm Machinery & Labor Sharing Manual," Staff General Research Papers Archive 34482, Iowa State University, Department of Economics.
    5. Hall, Bronwyn H. & Khan, Beethika, 2003. "Adoption of New Technology," Department of Economics, Working Paper Series qt3wg4p528, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    6. Fulton, Murray E. & Harris, Andrea, 2000. "The Cuma Farm Machinery Co-Operatives," Miscellaneous Publications 31774, University of Saskatchewan, Centre for the Study of Co-operatives.
    7. McBride, William D., 2003. "Production Costs Critical to Farming Decisions," Amber Waves, United States Department of Agriculture, Economic Research Service, September.
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    Cited by:

    1. Dowling, Alexander W. & Kumar, Ranjeet & Zavala, Victor M., 2017. "A multi-scale optimization framework for electricity market participation," Applied Energy, Elsevier, vol. 190(C), pages 147-164.

    More about this item


    Locational marginal pricing; Wholesale power markets; restructuring; electricity; Midwest ISO;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D6 - Microeconomics - - Welfare Economics
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy


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