What is locational marginal pricing (LMP)?
Instead of providing one region-wide wholesale energy price, prices for energy under SMD will be calculated at 900-plus locations in New England. These locational marginal prices are determined by the cost of serving an increment of load at each location and will include the cost of congestion. When the system is unconstrained, the prices at each location will be equal. When the system is constrained, prices increase as more expensive generators are dispatched to relieve the congestion problem. In this instance, prices will vary by location. Since each price reflects the cost of supplying one more increment of load at a given location, it provides a precise, market-based method for valuing energy that includes the cost of congestion.
