Forecasting energy prices in a competitive market

Deregulation is intended to encourage competition among utilities and power marketers to reduce energy prices. The pricing system is very critical in restructuring the electrical industry and depends upon market rules and the function of the independent system operator (ISO). The locational marginal pricing (LMP) system is in use in the Pennsylvania, New Jersey, Maryland (PJM) Interconnection ISO and is proposed for the New York ISO, which is expected to be in operation in 1999. This article provides fundamental concepts of the LMP and outlines the basic requirements for a computer simulation tool to accurately forecast prices in an LMP-based market. Examples are used to demonstrate the concepts, and some preliminary results for the Eastern Interconnection are presented.