The greatest benefits of time-of-use pricing come from avoided costs of peaking power and T&D capacity—but only if hourly retail prices accurately model the true costs of delivered energy,...
Locational marginal prices in PJM respond to demand and fuel costs.
increase in average hourly load from 2006 to 2007, holding fuel prices at their 2006 levels, means that more expensive units had to be dispatched on average to satisfy the higher demand leading to the increase in LMP.
In 2008 and in 2009, fuel-cost adjusted LMP is below the load-weighted average LMP at the same prices from the previous year. In this case, declining load in 2008 and in 2009 explains this drop in fuel-cost adjusted LMP. For example, in 2008 the average hourly load was lower than the average hourly load in 2007. Holding prices at their 2007 levels, this means that less expensive units were required to satisfy demand on average. However, in 2008, fuel prices increased, leading to an increase in overall load-weighted average LMP in spite of the decrease in demand. Similarly, if hourly average demand in 2008 had stayed at the higher 2007 level, the fuel price increases observed in 2008 would have led to an even larger increase in load-weighted average LMP than the increase from $61.66/MWh in 2007 to $71.73/MWh in 2008.
LMP and Competitive Forces
Critics of wholesale markets only lament increases in prices and usually don’t recognize the periods when prices decline as they have at times during the past four years. In reality, LMPs in PJM are driven by supply-side fundamentals of fuel prices and demand-side fundamentals—as evidenced by LMP changes that correlate to the sharp increase in average demand in 2007 followed by declines in demand in 2008 and 2009 related to mild weather and the recession.
The Independent Market Monitor for PJM also recognizes both of these fundamentals in its annual State of the Market Report . Moreover, the market monitor always has found the results of PJM’s wholesale electricity markets to be competitive, meaning that the price outcomes are driven by competitive behavior and supply-and-demand fundamentals.
Discussions about how wholesale electricity markets are working should begin with a discussion of the underlying fundamentals driving changes in LMP. When that occurs, it’s clear that LMP responds to those fundamentals and that wholesale markets produce competitive results.