Marginal loss calculation in competitive electrical energy markets

The core of FERC proposed standard market design (SMD) in the US is locational marginal pricing (LMP) for electrical energy by which the energy prices are to be determined based on marginal costs in order to promote economic efficiency. One of the main challenging issues in implementing LMP methodology is the pricing of marginal losses, which requires accurate analysis of transmission losses and incorporating the effects of marginal losses into the optimal generation scheduling process. This paper presents two optimal generation scheduling algorithms where the effects of marginal losses are reflected through the use of penalty factors and delivery factors. Both algorithms are consistent with the overall SMD energy pricing approach, allowing for the calculation of three different LMP components: marginal energy cost, marginal congestion cost, and marginal loss cost. The algorithms are benchmarked with the NYISO method on a simple two-bus system, and then examined using a more realistic five-bus system. Some important issues on the implementation of marginal loss pricing in competitive energy markets are discussed.