Locational Marginal Pricing Explained

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The real time pricing of electricity at many points across PJM’s grid makes it possible for wholesale power markets to function. This pricing, also known as Locational Marginal Pricing, or LMP, is newly explained in an updated fact sheet at pjm.com.

A global standard for energy markets and operations, LMP was introduced at PJM in 1998. The concept pioneered a new way of accurately reflecting the cost of making and delivering electricity in real time. The formula for LMP incorporates many factors, including the costs of generation and transmission.

Knowing how much electricity costs at any given point allows market participants to make prudent decisions about investment, resulting in greater reliability, innovation and market liquidity. LMP also illustrates system congestion at a glance. This knowledge assists PJM operators as they safely dispatch the flow of power wherever it is needed at the lowest cost.

Education about fundamental market concepts like LMP is a part of PJM’s mission to deliver reliable, secure power across the bulk electrical system spanning 13 states and Washington, D.C. Learn more at the PJM Learning Center.