The LMP Model: Bottlenecking Merchant Transmission

Locational marginal pricing has not been adequate in providing transmission expansion incentives. Others are needed.

With the controversy created by the inclusion of locational marginal pricing (LMP) and a two- settlement system as part of FERC's standard market design (SMD), many questions have been raised about the market rules and procedures needed to support transmission infrastructure improvements, including transmission expansion. Noting that little, if any, transmission expansion beyond direct generation interconnection has occurred in the regions using LMP, some have questioned the ability of the current LMP systems to provide effective transmission expansion incentives.

In the markets in the Northeast, where LMP has been in place and sending regular price signals to market participants, there is forward movement and progress on developing some of the necessary market mechanisms to support structural remedies for congestion; however, much more remains to be done to ensure the viability of structural solutions.

While the development of unforced capacity deliverability rights (UDRs)¹ is a step forward in providing the correct incentives for merchant transmission, it remains unclear whether these and other existing incentives will be sufficient to ensure that necessary economic improvements to the transmission system will be undertaken.