Part 2 of 2.
Locational “marginal” prices come in many flavors. This is what the paper mentioned by Len says “LMP is still a new model and only time will definitively demonstrate its successes or failures. LMP will probably never be a perfect solution for all wholesale market concerns. It has its limitations. At this time, LMP is largely a supply-side focused approach to organized markets. Integration of demand-side factors to such issues as transmission congestion or generation shortages remains to be considered.
There is another flavor in the article Demand Response and the FERC Standard Market Design NOPR:
There is still another flavor under EWPC, which will be much better than what was though for the SMD, as the system engineering institution satisfies the ultraquality requirements. Retailers will concentrate no on lower prices to customers, but on lower costs and/or higher value, as business designs innovations will aim to that. Most of the customers will – eventually - have lower prices. However, customers that are receiving energy cross-subsidies and/or hidden supply security cross-subsidies might have higher prices later on.
Demand Response, Locational Marginal Pricing, and Centralized Markets
In the proposed Standard Market Design (SMD), the key elements that would encourage demand response are locational marginal pricing (LMP) and the establishment of centralized day-ahead and real-time markets for energy, ancillary services, and transmission services. LMP and centralized markets provide efficient wholesale price signals to which LSEs and customers might respond if retail market designs allow such response. Over the longer term, LMP and centralized markets will lead to more efficient investment in generation, transmission and demand response technology, resulting in lower costs and ultimately lower prices to
LMP will allow demand response to play a role in relieving transmission constraints, both in the short and the long term, by communicating the cost of electricity service to customers. Locational marginal prices are the only prices that are consistent with efficient system dispatch, and they are the only prices that induce self-interested loads to consume efficient quantities of power and profit-maximizing generators to produce efficient quantities of power.