LMP (Locational Marginal Pricing)

Locational Marginal Pricing (LMP) is a method used in electricity markets to determine the cost of supplying the next unit of power at different locations on the grid. It reflects not only the overall electricity demand but also the physical limitations of transmission lines. As a result, electricity may cost more in some areas than others, especially when the grid is congested. LMP helps ensure efficient pricing, encourages investments to improve infrastructure, and signals where additional generation or transmission capacity is needed to meet varying regional demands effectively.