The cost of transportation, particularly when it is a significant part of the overall cost of a product, provides an incentive to try to place production facilities close to the final consumer. Of course, often it costs much more to build big production facilities close to consumers instead of further out, and consumers often don’t want to live too close to production facilities anyway. So the way out of this little quandary? For some folks in the electric power industry, the solution appears to be to complain about efficient delivery charges.
Last week the Federal Energy Regulatory Commission ran a technical conference on wholesale power market competition, providing a forum for critics, advocates and others interested in the industry to air their concerns about the current state of policy and market developments. Among the issues raised were complaints about use of locational marginal pricing (LMP) to price power deliveries on the grid.
Roy Thilly of Wisconsin Public Power was among those objecting to LMP. According to Electric Utility Week:
Thilly ticked off his reasons for questioning LMPs: Wind is built were the wind is, not where the high LMPs are; coal is built where it can be permitted, usually not near load pockets; nuclear reactors are not going to be build where the load is. So LMP is not the key, he said.
Thilly is a pretty bright guy, so this line of argument was kind of surprising to me. Talk about your non sequiturs. Actually it is worse than a non sequitur, it is an anti sequitur. Resources are not naturally located where the consumers are, so the transmission grid is used to deliver the power. Transmission is not free, so it is good to price it efficiently (so resources don’t get wasted). How do you price it efficiently? LMP is the key.