ERCOT LMP Components — Energy, Congestion, and Loss
Key Takeaway
ERCOT LMPs consist of three components: energy (system-wide marginal cost), congestion (location-specific transmission constraint cost), and loss (marginal transmission losses).
Quick Answer
ERCOT Locational Marginal Prices (LMPs) equal the sum of three components: energy (system-wide marginal cost, same everywhere), congestion (location-specific, can be positive or negative), and loss (marginal transmission losses at that location).
Energy Component (System Lambda)
The marginal cost of serving one additional MW of load system-wide. Set by the most expensive generator dispatched. Identical at every settlement point in a given interval.
Congestion Component
Reflects transmission constraints between locations. Positive congestion = expensive side of a constraint. Negative congestion = cheap side. West Texas wind surplus creates negative congestion at West Texas nodes. Houston load concentration creates positive congestion at Houston nodes.
Loss Component
Reflects marginal transmission losses. Locations distant from generation centers have higher loss components.
LMP Formula
LMP = Energy + Congestion + Loss
Why Prices Differ
Two nodes with the same energy component can have very different LMPs due to congestion and losses. A West Texas wind farm node may have a $20 energy component minus $30 congestion = -$10 LMP, while a Houston load zone has $20 energy + $5 congestion + $2 loss = $27 LMP.
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Frequently Asked Questions
Energy (system-wide marginal cost, identical everywhere), congestion (location-specific transmission constraint cost, positive or negative), and loss (marginal transmission losses).
Excess generation (usually wind in West Texas) that cannot be exported due to transmission constraints creates negative congestion, driving total LMP negative at those locations.
ERCOT's term for the system-wide energy component of LMP — the marginal cost of one more MW from the cheapest available source. Same at all settlement points.
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