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Market Redesign and Technology Upgrade

Skip Navigation LinksPUC > Energy > Federal and Regional Energy Policy > California's Wholesale Market Design and Operations > Market Redesign and Technology Upgrade > Locational Marginal Pricing

Locational Marginal Pricing

Locational Marginal Pricing (LMP), a primary feature of MRTU, is the calculation of electricity prices at thousands of pricing points, or nodes, within California’s electricity grid. It provides price signals that account for the additional costs of electricity caused by transmission congestion and line loss at various points on the electricity grid. LMPs allow CAISO to efficiently determine the interaction of energy supply and energy demand..

If transmission congestion and line loss did not occur, electricity prices across the electric grid would be the same as they are at the point of energy supply.  Transmission congestion occurs when demand for energy exceeds the capacity of transmission lines to convey that energy; for example, when high demand from localized, highly populated areas, or ‘load pockets’ constrain the capacity of transmission lines causing bottlenecks in the grid. As a result, load may not be able to access cheaper energy from distant sources. Line loss refers to the volume of electricity that is lost to the system as electricity travels from source to load. The greater the distance, the greater the loss of electricity. Congestion and line losses cause the actual cost of delivering electricity to vary at various locations on the grid. 

Currently, California’s wholesale electricity market is divided into three zones, each with a uniform price. Thus, the current wholesale energy price does not reflect the costs of congestion and line loss as elements of the price of energy. The expensive energy purchased to overcome the limitation of congestion is spread throughout zonal prices, concealing the true cost of providing electricity. 

During the development of MRTU, the CPUC has supported CAISO’s use of LMP on the basis that it creates greater transparency of congestion and congestion costs.  The benefit of LMPs in increasing market efficiencies, however, presumes a robust transmission infrastructure to assure that customers have access to a variety of energy sources.  Prior to California’s electric restructuring in the late 1990’s, California’s utilities weighed the value of transmission in a manner very different from that contemplated within the MRTU program. The outcome of past transmission construction decisions is reflected in much of the infrastructure we have today that is largely defined by a three-utility-zoned California   The CPUC has, therefore, argued in favor of an LMP framework that averages energy prices paid by customers at the zonal level,or Load Aggregation Point,  to prevent price shock to a market that was built upon a framework designed by and for vertically integrated electric utilities.  In time, a more robust transmission infrastructure may develop and nodal prices may more appropriately be passed on to end-use customers.

The CPUC Filings: Highlights: 

18. MRTU/CPUC Comments to FERC/May 16, 2006/FERC Docket No. ER06-615

  

Last Modified: 11/12/2008


 
 
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