Nodal Pricing in an LMP Energy Market APEX 2005 Annual Conference Orlando, FL October 31, 2005 Stu Bresler GM, Market Operations PJM Interconnection, LLC

Pricing method PJM uses to … What is LMP? Pricing method PJM uses to … price energy purchases and sales in PJM Market price transmission congestion costs to move energy within PJM Control Area Physical, flow-based pricing system how energy actually flows, NOT contract paths

Definition: Locational Marginal Pricing Cost of supplying next MW of load at a specific location, considering generation marginal cost, cost of transmission congestion, and losses. LMP Generation Marginal Cost Transmission Congestion Cost Cost of Marginal Losses = + + Read the slide This is the equation for Locational Marginal Price, or LMP. The cost of marginal losses ( the last “box”) is not currenlty included int eh PJM implementation of LMP. So, LMP is the cost to serve the next MW of load a specific location, using the lowest energy production oct of all available generation, while e observing critical transmission limits. LMP is a pricing approach that addresses congestion costs, by reflecting the cost of re-dispatch for out-of-merit generation and the cost of delivering energy to the location. (Cheaper generation may not be fully loaded, if there is a transmission constraint.) We will see why this is necessary later in this session. Under this pricing mechanism, buyers and sellers experience the actual cost to deliver energy at their loation onteh transmission system. Therefroe, LMP encourages the efficient use of the transmission system by assigning cost to users, based on the way energy is actually delivered. Cost of Marginal Losses is not currently implemented

Managing Congestion on the Power Grid LMP is not a new concept to power system operators. For many years, system operators have managed congestion using least-cost security constrained dispatch which are the same programs that calculate LMP. The PJM LMP-based market provides an open, transparent and non-discriminatory mechanism to manage transmission congestion under open transmission access.

PJM LMP Implementation Least-cost security-constrained dispatch optimizes energy and reserves and calculates unit specific dispatch instructions for the next five-minute period. (ex-ante dispatch) LMP values calculated every five minutes based on actual generation response to dispatch instructions that were sent in the previous five minute period. (ex-post pricing) Real-time performance monitoring software determines if generator is following dispatch instructions.

Keys to Locational Pricing Keys to successful implementation of locational pricing: Prices must be consistent with dispatch instructions. Prices must be made readily available to participants in real time. Participants must have certainty that prices will not change once finalized. PJM ensures these objectives are met by: Posting real time prices every 5 minutes on its eData application. Maintaining a rigorous LMP verification process.

eData Main Screen

Nodal vs. Zonal Pricing Consistency between pricing and dispatch is critical. In the absence of this consistency, supplemental settlement accommodations must be made to preserve the incentive for generators to follow dispatch instructions. Correct price signals must also be seen by loads in order to support other long-term initiatives based on locational pricing such as economic transmission planning.

Nodal vs. Zonal Pricing Zonal pricing cannot result in accurate price signals for all constrained conditions. Constraints that should cause prices to split within a pricing zone will result in inaccurate prices for a portion of the zone. While it may be possible to define zones that correctly capture all constraints at a given instant, the zones will need to be continually redefined as system conditions evolve, leading to participant uncertainty. The following actual PJM market results illustrate how significantly prices can vary within a zone due to certain transmission constraints.

Intra-Zonal Congestion Examples PSEG Max $683.74 Min -$275.07

Intra-Zonal Congestion Examples PSEG Max $683.74 Min -$275.07 DUQ Max $70.45 Min $24.43 AEP Max $97.21 Min $56.46 APS Max $135.81 Min $26.40 DOM Max $127.33 Min -$39.64

Hubs and Zones in a Nodal Market An LMP Market with nodal pricing can also include overlying trading hubs and zones to provide standard energy products for the commercial markets. These hubs and zones, however, must be a standard compilation of individual nodes for participants to have certainty regarding their definitions. The settlement scheme must also allow for “carve-outs” from the zonal aggregations to accurately model retail choice arrangements.

Questions?