A General Formulation for LMP Evaluation

The evaluation of locational marginal prices or LMPs, which constitute the basis of the new generation of market design in the U.S., is a critical need in the side-by-side operation of electricity markets and power systems. Their use in various applications such as congestion management and hedging requires specific LMP components in the computations. We provide a general formulation for the evaluation of the LMP components by making explicit use of the important role played by the nodes with generators with free capacity. On the other hand, the LMPs of the nodes without generation or with the generators at their limits are a function of the LMPs at the marginal nodes and the impacts of the network constraints, including the losses in the network. In the formulation, we pay special attention to the importance of the assumptions and specifications - the so-called policy specification - in the determination of the components. We obtain a very general formulation that brings under a single framework the different decomposition approaches that exist. The formulation's comprehensiveness brings numerous insights into the various decompositions, provides a platform for their comparative analysis, and allows us to understand the direct implications and the role of the policy specified. Moreover, the formulation reveals the limitations of any decomposition into the components due to the underlying structural interdependencies among them, which is clearly shown in this paper. We provide an example to illustrate the capabilities and the insights obtainable with the use of this formulation.