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What is locational marginal pricing (LMP)?


Locational marginal pricing (LMP) is the pricing method that PJM uses to price energy purchases and sales in the PJM market and to price transmission congestion costs to move energy within PJM.

The Energy Market uses locational marginal pricing (LMP) which reflects the value of energy at a specific location at the time that it is delivered. If the lowest-priced electricity can reach all locations, prices are the same across the entire grid. When there is transmission congestion (heavy use of the transmission system in an area), energy cannot flow freely to certain locations. In that case, more expensive and advantageously located electricity is ordered to meet that demand. As a result, the LMP is higher in those locations.

LMP is analogous to a taxi ride for megawatts of electricity. When traffic is light you can expect consistent and predictable fare, which would represent a period with little to no congestion on the grid. Similarly, heavy traffic results in a higher fare which is representative of a time of congestion on the transmission system.

Markets & Operations Overview
  1. What is an energy market?
  2. What is PJM’s role in energy markets?
  3. What is locational marginal pricing (LMP)?
  4. What are the types of energy markets in PJM?
  5. What does capacity mean?
  6. What is the difference between the energy markets and the capacity market?
  7. What is PJM Settlement Inc.?
  8. What is Price Responsive Demand?
  9. What are eTools? Who has access to them?