LMP is an acronym for Locational Marginal Pricing, which reflects the value of electricity at a specific location at the time it is delivered, typically expressed as prices for 15 minute time intervals. In deregulated electricity markets, LMP prices are representative of wholesale electricity costs set in both day ahead and real time markets, and fluctuate based on market dynamics including generation availability, transmission availability, weather and customer behavior.
The LMP Index electricity product has become a common product structure since the advent of deregulated electricity markets. Rather than committing to a fixed price, a LMP Index contract indexes the electricity price to LMP prices, and the contract price is a formula of an LMP price plus a fixed retail adder as follows:
Contract Price = Shaped LMP Index Price + Retail Adder
Shaped LMP Index Price:
The sum product of each LMP price and the client’s consumption across all of the intervals in a billing period, expressed in $ per kWh
Fixed for the contract term, includes ancillary services, line losses, ISO fees, retailer margin and consultant fee, expressed in $ per kWh
Some clients use this purchasing strategy in hopes of achieving lower prices over time than offered by a fixed price product. Over periods of time, LMP prices may offer a lower cost, however there is significant risk as LMP prices are impossible to predict and a client will not know his price until after the energy is consumed. Price spikes tend to happen unexpectedly, tend to coincide with peak usage periods and can lead to significant cost swings, with one invoice amount being several multiples of others. Additionally, some retail suppliers prefer to sell index products as it significantly shifts risk from them to the client.
A potential benefit of an LMP product can be achieved if a client can implement load shifting. LMP prices are typically higher during peak usage periods (weekdays) and lower during off peak periods (nights and weekends). Clients who can shift consumption from on peak periods to off peak periods may realize lower costs by avoiding higher energy prices.
To learn about additional electricity products, visit one of the links below or contact us to explore how a LMP structure may work for your business.
Other Electricity Products