LMP Market Design

LMP Market Design

Scott Harvey - Local Marginal Pricing Market Power

Locational Marginal Pricing (LMP), Price Formation and Competitive Electricity Markets


All centrally coordinated electricity markets in the U.S. currently employ locational pricing to price electric energy.

  • PJM implementation: April 1, 1998
  • New York ISO implementation: November 19, 1999
  • ISO New England implementation March 1, 2003
  • MISO implementation: Aprli 1, 2005
  • Southwest Power Pool implementation: February 1, 2007
  • California ISO implementation: Aprli 1, 2009
  • ERCOT implementation: December 1, 2010.
  • Western EIM November 1, 2014

Outside of the U.S., locational marginal pricing has been used in New Zealand for more than 20 years, and versions of locational pricing have been used in Chile and Norway for many years. The papers and presentations below cover the basics of locational marginal pricing, as well as topics that are in the forefront of the evolution of U.S. electricity markets. These topics include the causes and impact of uplift costs, issues related to price formation when cost functions are not convex, and the features of an locational marginal pricing system that can be used to address these issues such as extended LMP. Papers relating to the impact of reserve shortage pricing and simultaneous optimization of energy and reserves on price formation are listed in the ancillary services section below.

The papers begin with William Hogan's 1992 paper on locational marginal pricing that started the discussion of using locational spot price for transmission price. This paper is followed by the FERC testimony of William Hogan and Susan Pope supporting the LMP based open access tariffs filed by the PJM Supporting Companies and the Member Systems of the New York Power Pool over 1996 and 1997 that explain the application of locational marginal pricing to transmission pricing and open access to the transmission grid.

Papers on the intertwined, but distinct, topics of uplift minimization and fixed block pricing start with William Hogan and Brendan Ring's 2003 paper on uplift minimization, followed by Paul Gribik, William Hogan, and Susan Pope's 2007 paper on extended LMP as it was applied in MISO. The discussion of extended LMP continues in papers by Michael Cadwalader, Paul Gribik, William Hogan and Susan Pope. Finally, out of temporal sequence, Scott Harvey's 2018 presentation on the history of LMP and fixed block pricing discusses fixed block pricing as implemented by the NYISO beginning in November 1999.

Finally, an important feature of economic dispatch and LMLP pricng is that the dispatch and prices should satisfy economic first and second order conditions for welfare maximization. This feature can in turn be used to test whether ISO price calculations and optimization software is operating as intended. Notes describing the application of this methodology to testing he NYISO softeware in 1999 and the California ISO MRTU software in 2008 are included below. In addition to illustrating the application of this methodolgoy to software testing, these notes explain the efficiency conditions that the software solutions and LMP prices should satisfy. and presentations by

Panagiotis Andrianesis, Michael C. Caramanis and William W. Hogan, "Computation of Convex Hull Prices in Electricity Markets with Non-Convexities using Dantzig-Wolfe Decomposition,"December 24, 2020.

William W. Hogan, "Electricity Market Design, Multi-interval Pricing Models," Harvard Electricity Policy Group, June 22, 2020.

William W. Hogan, "Strengths and Weaknesses of the PJM Market Model," Handbook on the Economics of Electricity, November 26, 2019.

Scott M. Harvey, "The History of LMP Pricing Development and the Origins of Fixed Block Pricing," PJM Price Energy Price Formation, Senior Task Force Meeting, Valley Forge, Pennsylvania, March 5, 2018.

William W. Hogan and Susan L. Pope, "Priorities for the Evolution of an Energy-Only Electricity Market Design in ERCOT," May 9, 2017

Scott M. Harvey, "The Load Bias Limiter, Price Formation, and the Need for Flexible Capacity," California Market Surveillance Committee, Folsom, CA, May 5, 2017.

Scott M. Harvey, "Market Impacts of Shift Factor Truncation," California Market Surveillance Committee, Folsom, CA, June 17, 2016.

Susan Pope, "Price Formation in ISOs and RTOs," October 2014.

William W. Hogan, "Electricity Market Design and Efficient Pricing: Applications for New England and Beyond," June 24, 2014.

Scott M. Harvey, "Is the California ISO Becoming an Uplift Market? Pricing, Uplift and Commitment," May 19, 2014 California ISO Market Surveillance Committee

Scott M. Harvey, "Pricing and Price Signals: What is the problem we are trying to solve?" California ISO Pricing Forum, April 22, 2014.

William W. Hogan, "Electricity Market Reform: Market Design and Extended LMP." NHH Workshop on Pricing in Deregulated Energy Markets presentation, Voss, Norway. November 28, 2011.

Michael Cadwalader, Paul Gribik, William Hogan, Susan Pope, "Extended LMP and Financial Transmission Rights," June 9, 2010.

Scott M. Harvey, Matthew Kunkle, Benjamin Hagberg, and Shaun Glassman, "Final Report: Analysis Track Testing of CAISO MRTU Pricing and Dispatch," Prepared for California Independent System Operator, October 20, 2008.

Paul R. Gribik, William W. Hogan and Susan L Pope, "Market-Clearing Electricity Prices and Energy Uplift," December 31, 2007.

Scott M. Harvey, Susan L. Pope and William W. Hogan, "Comments on the California ISO MRTU LMP Market Design," California Independent System Operator, February 23, 2005.

William W. Hogan and Brendan J. Ring, "On Minimum-Uplift Pricing for Electricity Markets," March 19, 2003.

Scott M. Harvey, William W. Hogan, Susan L. Pope, Andrew P. Hartshorn and Kurt Zala, "Final Report on Phase IV Market Trials," prepared for the New York Power Pool , October 26, 1999.

William W. Hogan, "Getting the Price Right in PJM: Analysis and Summary: April through September," October 11, 1998.

William W. Hogan, "Getting the Price Right in PJM:What the Data Teach Us," Electricity Journal, August-September 1998.

Susan Pope, "Affidavit on Congestion Pricing," prepared for the Member Systems of the New York Power Pool, Docket ER97-1523 et al, December 2, 1997.

William W. Hogan, "Report on the Proposal to Restructure the New York Electricity Market," prepared for the Member Systems of the New York Power Pool, January 31, 1997.

William W. Hogan, "Report on PJM Market Structure and Pricing Rules," prepared for the PJM Supporting Companies, December 31, 1996.

William W. Hogan, "Appendices to Report on PJM Market Structure and Pricing Rules," prepared for the PJM Supporting Companies, December 31, 1996.

William W. Hogan, "A Wholesale Pool Spot Market Must Be Administered by the Independent System Operator: Avoiding the Separation Fallacy," Electricity Journal, December 1995.

William W. Hogan, "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, September 1992, Volume 4 #3