Understanding Locational Marginal Prices (LMPs) and Strategic Value of Water in Optimal Dispatch

Abstract

This paper develops models of optimal power flow (OPF) applied to different power systems increasing in complexity; a thermal system without transmission representation, a thermal one with the transmission system, and a hydrothermal system with transmission constraints and a reservoir allowing water management and Peak Load Shaving. This paper develops algebraically the modeling of these features and their effect on optimal dispatch and on short-term energy prices (varying in time and space). This is supported by the use of very simple numerical examples. We conclude that prices are strongly affected by both physical and economical characteristics of the systems. Transmission has a key role here, especially shaping prices over the space and limiting the strategic value of water storage.