Retail Issues Associated With Locational Marginal Cost Pricing

1
Retail Issues Associated With Locational Marginal
Cost Pricing
Presented by Laura Manz September 13, 2002
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Why LMP?

• LMP works with an open spot market that serves as
  a solid foundation for retail choice where even
  small Load Serving Entities without large
  portfolios can obtain market-priced balancing to
  manage their contract and delivery risk. LMP
  makes the balancing prices fair and efficient.

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Retail Choice Rests on a Solid Wholesale
Foundation

• LMP provides transparency in spot energy and
  transmission pricing to provide the platform for
  retail choice
• No hidden congestion uplift
• ARRs/FTRs/CRRs for price certainty
• Provides short run signals for energy and
  transmission prices and long run signals for
  planning and expansion
• Provides information that enables choices on how
  to use the price signals to benefit customers
• Economic signals to regulators, market
  participants, and (ultimately) consumers
• For settlements, LMPs can be individual nodes or
  aggregated blends

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LMP, Based on Integrated Dispatch Functions
RTO Functions
Market Inputs
Market Support
Ensure Reliability
Generator Bids
Cover Imbalances
A/S Markets
Co-Optimized
Real-Time Balancing
Regional Security- Constrained Economic Dispatch
Load Bids
Buy and Sell Spot Energy
Buy Through Congestion (LMPB - LMPA)
Bilateral Schedules
Congestion Redispatch
Calculate Nodal Spot Prices
Hedge Congestion (LMPB - LMPA)
Self Schedules
Allocate Auction FTRs
Market-Driven Decisions
Settlements at LMP Prices

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Value Added Services

• LMP prices the security-constrained economic
  dispatch and thus provides the correct signals
  for managing and expanding the grid
• This efficiency requires retailers to focus on
  value added services
• Once wholesale prices are reasonably reflected to
  customers, the focus of retailers will
  necessarily shift away from arbitraging price
  disconnects and seasonal shifting to capture
  economic value from wholesale/retail price
  disconnects

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Why Fixed Retail Credits Require Restrictions on
Switching
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The Importance of Demand Response

• A well-functioning market encompasses bids and
  offers from supply and demand
• Day-ahead markets are very helpful in enabling
  market-based demand response
• Although jump start programs may be necessary
  in the short run, they will distort values over
  the long run
• The correct way to compensate for demand
  reduction is to not charge for energy not used
• Customers with interval meters can be credited
  and charged for market-based purchases and sales

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Creating a Level Playing Field
Demand - 1 MW _at_ LMP
Supply - 1 MW _at_ LMP
1 less MW charged at its LMP
1 less MW paid at its LMP
Transmission D 1 MW _at_ LMP
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Creating a Level Playing Field
Demand 1 MW _at_ LMP
Supply 1 MW _at_ LMP
1 more MW charged at its LMP
1 more MW paid at its LMP
Transmission D 1 MW _at_ LMP
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States play a key role

• Transparent market prices at wholesale provide
  the foundation for states to connect customers to
  market prices
• States can connect customers to markets by basing
  retail rates on LMP spot prices
• Measurement is a key factor to enabling
  meaningful behavior
• Ability to measure response and credit/charge at
  the real-time price
• Interval meters, not necessarily real-time
  (reliability) meters to measure interval usage

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LMP is Key

• LMP pricing provides the correct signals for
  demand-side response - the most important missing
  element in most markets