Locational Marginal Pricing & Grid Congestion (2D)

Grid Conditions

Demand — Area A 245 MW

Demand — Area B 305 MW

Interconnector capacity 100 MW

Area A wind output 35 MW

Market Outcome

UNCONGESTED — one clearing price

Price A

— $/MWh

Price B

— $/MWh

Flow A→B

— MW

Congestion rent

— $/h

Marginal unit (A / B)

— / —

How it works

Two areas each clear their own merit-order stack — generators ranked cheapest to most expensive. The market operator picks a transfer F (MW from A to B) across the interconnector to minimise total cost:

gen_A = demand_A + F     gen_B = demand_B − F
price_A = marginal cost of the last MW dispatched in A
price_B = marginal cost of the last MW dispatched in B

Without any limit, F moves until price_A = price_B (a single continent-wide price — "market coupling"). If that F exceeds the line's thermal limit, the interconnector congests: F is clamped at the limit, cheap power can't fully reach the expensive area, and the two locational marginal prices (LMPs) permanently diverge.

Congestion rent = F × (price_B − price_A)   [$/h]

That rent is the money collected by whoever holds the transmission right — it is exactly the value unlocked by building more transfer capacity. Raise the interconnector-capacity slider and watch the rent collapse to zero once the line stops binding; add cheap wind to Area A and watch its own price fall — and, once the line is congested, watch Area B's price stay stubbornly high because the cheap power has nowhere left to go. The strip chart below the stacks plots both prices over time so you can see convergence and divergence happen live as you drag the sliders.

This is the real mechanism used in nodal power markets (PJM, ERCOT locational pricing, the EU's flow-based market coupling) to price transmission scarcity.

Cheap generation Mid-cost generation Peaker (expensive) Current dispatch level