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Derivation of Locational Marginal Prices for Restructured Wholesale Power Markets

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

Abstract

Although locational marginal pricing (LMP) plays an important role in many restructured wholesale power markets, the detailed derivation of LMP as it is actually used in industrial 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 alternating current and direct current optimal power flow models are presented to help us understand the derivation of LMP. 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) that are presented without derivation in the business practice manuals of the US Midwest Independent System Operator.

Suggested Citation

  • Liu, Haifeng & Tesfatsion, Leigh & Chowdhury, Ali A., 2009. "Derivation of Locational Marginal Prices for Restructured Wholesale Power Markets," ISU General Staff Papers 200901010800001390, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:200901010800001390
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    Cited by:

    1. Li, Hongyan & Tesfatsion, Leigh, 2012. "Co-learning patterns as emergent market phenomena: An electricity market illustration," Journal of Economic Behavior & Organization, Elsevier, vol. 82(2), pages 395-419.
    2. Tesfatsion, Leigh, 2023. "Locational Marginal Pricing: When and Why Not?," ISU General Staff Papers 202307051413210000, Iowa State University, Department of Economics.
    3. Battula, Swathi & Tesfatsion, Leigh & McDermott, Thomas E., 2020. "An ERCOT test system for market design studies," Applied Energy, Elsevier, vol. 275(C).
    4. Albert Banal-Estañol & Augusto Rupérez-Micola, 2010. "Are agent-based simulations robust? The wholesale electricity trading case," Economics Working Papers 1214, Department of Economics and Business, Universitat Pompeu Fabra.
    5. Somani, Abhishek, 2012. "Financial risk management and market performance in restructured electric power markets: Theoretical and agent-based test bed studies," ISU General Staff Papers 201201010800003479, Iowa State University, Department of Economics.
    6. Young, David & Poletti, Stephen & Browne, Oliver, 2014. "Can agent-based models forecast spot prices in electricity markets? Evidence from the New Zealand electricity market," Energy Economics, Elsevier, vol. 45(C), pages 419-434.
    7. Tesfatsion, Leigh, 2022. "Economics of Grid-Supported Electric Power Markets: A Fundamental Reconsideration," ISU General Staff Papers 202209141325510000, Iowa State University, Department of Economics.
    8. Karhinen, Santtu & Huuki, Hannu, 2020. "How are the long distances between renewable energy sources and load centres reflected in locational marginal prices?," Energy, Elsevier, vol. 210(C).
    9. Bjørndal, Endre & Bjørndal, Mette Helene & Coniglio, Stefano & Körner, Marc-Fabian & Leinauer, Christina & Weibelzahl, Martin, 2023. "Energy storage operation and electricity market design: On the market power of monopolistic storage operators," European Journal of Operational Research, Elsevier, vol. 307(2), pages 887-909.
    10. Li, Hongyan & Sun, Junjie & Tesfatsion, Leigh S., 2009. "Separation and Volatility of Locational Marginal Prices in Restructured Wholesale Power Markets," Staff General Research Papers Archive 13075, Iowa State University, Department of Economics.

    More about this item

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D6 - Microeconomics - - Welfare Economics
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise
    • 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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