Design and operation of the locational marginal prices-based electricity markets

Locational marginal prices (LMP)-based electricity markets are implemented in different countries around the world and are dominant in the United States. Even after ten years of the operation, some of the properties of the LMP are not well understood. There are many misconceptions about this clearing mechanism that led to some inefficient market designs. This study is an attempt to consistently present the current state of the LMP-based congestion management, including issues that market and system operators are facing, and analyse new directions of the research. The recommendations are made on which areas are of high priority and should be addressed first. Besides giving a systematic description on how the LMPs are produced, the paper describes both the modelling and implementation challenges and solutions. (This paper solely represents the view point of the author and not necessarily ISO New England’s).