Locational Marginal Pricing, A Sore Point

Michael Giberson

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.

[You can find Thilly’s written statement here. [PDF] Several of the panelists at the conference submitted written remarks, available from the FERC website calendar page.]


8 thoughts on “Locational Marginal Pricing, A Sore Point

  1. Thilly’s argument and yours are different. Your contention is that on any particular day LMP produces efficient dispatch. He contends that people who say that LMP leads to efficient siting decisions are wrong bec/ LMP doesn’t drive real world decisions about where to build.

  2. Exactly. It’s not a matter of what’s “fair” to everybody concerned, it’s a matter of what the power is worth where it is generated and where it is consumed. Certainly it’s not the wind generator’s fault that he has to go where the wind is, but the fact may be that his power is just not worth much delivered to the grid at that spot. If we want wind power bad enough we can visibly subsidize it more, but we shouldn’t subvert electricity pricing on the grid for such objectives.

  3. “If we want wind power bad enough…” (D.O.U.G.)

    Why would we want wind power, or any other kind of power, specifically? We want economical, reliable power. Wind, particularly, misses the boat on both counts. The “fact” that 35% available “source of opportunity” power at the turbine generator is “almost competitive” with “four 9s” reliable power at the meter is unimpressive, at least to me.

    Government may want us to have wind power, for its own reasons; and, it may require us to have it through RPS. Why not? Government has no role in assuring that the 35% available “source of opportunity” power does not prevent, or significantly hinder, the operation of a “four 9s” grid. That is the utilities’ problem. Government was especially silent when the 35% available “source of opportunity” power was only ~4% available during really warm, still periods, as were experienced in CA last summer. Don’t want to question the “Great White Hope” on the unipole!

    Long before LMP had a name, large industrial customers located near sources of energy, for a variety of reasons. They understood the TNSTAAFL principle. It ain’t rocket surgery or brain science! Strangely, I have not noticed any significant increase in industrial construction near wind farms.

  4. “If we want wind power bad enough…” (D.O.U.G.)

    Why would we want wind power, or any other kind of power, specifically? We want economical, reliable power. Wind, particularly, misses the boat on both counts. The “fact” that 35% available “source of opportunity” power at the turbine generator is “almost competitive” with “four 9s” reliable power at the meter is unimpressive, at least to me.

    Government may want us to have wind power, for its own reasons; and, it may require us to have it through RPS. Why not? Government has no role in assuring that the 35% available “source of opportunity” power does not prevent, or significantly hinder, the operation of a “four 9s” grid. That is the utilities’ problem. Government was especially silent when the 35% available “source of opportunity” power was only ~4% available during really warm, still periods, as were experienced in CA last summer. Don’t want to question the “Great White Hope” on the unipole!

    Long before LMP had a name, large industrial customers located near sources of energy, for a variety of reasons. They understood the TNSTAAFL principle. It ain’t rocket surgery or brain science! Strangely, I have not noticed any significant increase in industrial construction near wind farms.

  5. I’m with you, Ed. I wasn’t suggesting that we DO want wind power all that bad. That was a broad “we,” however, and it does include some people who think wind is the answer. But the reported cost of wind power is rarely compared with its value, which is seriously degraded by the reliability issues as well as the locational problems. I want the costs and the benefits to be visible, not hidden in invisible subsidies. Then, if we still want wind power bad enough…

  6. Ostap, you are right to a point. Thilly was talking about investment decisions, not dispatch efficiency. If he was just trying to counter the obviously false idea that LMP is the only thing that matters in siting, then I would have to agree. But advocates of using LMP, who cite the beneficial effects of LMP on siting, don’t suggest that LMP is the only thing.

  7. D.O.U.G.,

    If “wind is the answer”, what is the question?

    Ed

  8. D.O.U.G.,

    If “wind is the answer”, what is the question?

    Ed

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