Locational Marginal Pricing

PJM uses locational marginal pricing to set prices for energy purchases and sales in the PJM market and to price transmission congestion costs. Congestion is when the lowest-priced energy is prevented from flowing freely to a specific area on the grid because heavy electricity use is causing parts of the grid to operate near their limits. True to its name, locational marginal pricing is based on the location in which the power is received or delivered.

Locational marginal pricing is analogous to a taxi ride for megawatts of electricity. When traffic is light, you can expect a consistent and predictable taxi fare, which would represent a period with little to no congestion on the grid. Similarly, heavy traffic results in a higher fare, which is similar to a time of congestion on the transmission system.

Taxi Cab Analagy