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Locational pricing makes the network secure, since the utilities and other market participants get 'paid' to monitor the grid.
Fortnightly Magazine - January 2004

demonstrates to all market participants where power needs to be increased or decreased. A generator or entity serving load could ignore these price signals that reflect system need. But, since the price is available to all participants in the market every five minutes, it is unlikely that such behavior would continue for very long.

During real-time operations, operators in a system similar to PJM would monitor all transmission limitations on the system and send electronic dispatch instructions to generators to manage transmission flows within the reliability criteria. The real-time energy market is based on the same security-constrained economic dispatch analysis that vertically integrated utilities use with the difference that the market makes the information available to all market participants over a broad regional area. Therefore, the locational prices that are posted for each generator every five minutes are consistent with the dispatch instruction that is sent to ensure reliable grid operation. Since the price signal is consistent with the dispatch instructions, generators tend to respond very quickly, resulting in a much more robust and reliable operating state.

Had this system existed on Aug. 14, it is very likely that pricing information would have prompted corrective action in the initial problem areas-through a redispatch of generation driven by the transparent prices-long before the outage became a cascading regional event involving 58,000 MW of load and generation. Two authors, University of Wisconsin Professor Fernando Alvarado and Rajesh Rajaraman, both of Christensen Associates, have in fact described how that would work.

In a paper dated Aug. 18, 2003, 6 less than a week after the blackout, Alvarado and Rajaraman explained in detail how various contingencies provided by the North American Electric Reliability Council in its initial timeline of events would have been handled under an LMP system.

They discussed how prices may have increased dramatically in certain areas for some period of time, but how this fact would have elicited action that very likely would have mitigated the problem in its initial stages (and avoided the resulting very broad economic implications).

LMP boosts reliability in other ways. As operated in PJM, the state estimator (an algorithm that evaluates the physical state of the grid) typically will anticipate 2,000 credible contingencies at more than 2,000 monitored elements in its system, resulting in 4 million potential configurations. This information is incorporated into the prices provided to market participants to ensure that operations include a level of conservative assumptions. This marriage of available technology, systems, and a transparent pricing system yields fast results in operation that benefit reliability while providing for the most efficient outcome from an economic standpoint.

In short, LMP enhances reliability in a manner that no penalty regime can achieve. The recent decision by the stakeholders of MISO to delay the adoption of an LMP market, therefore, will only delay the improvements in reliability that so many correctly want to achieve. This unfortunate decision should be reviewed and reversed as soon as possible.


  1. The Western Electric Coordinating Council recently has adopted mandatory standards with an associated penalty structure.
  2. This situation actually occurred a few