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Sep 17, 2026 - What is Locational Marginal Pricing?



If you want to explore LMPs across US markets and see how they shape battery revenues, head to the Modo Energy Terminal and ask Ko, our AI analyst.
Electricity does not cost the same everywhere. The price you pay for power depends on where it is being generated, where it needs to go, and how much infrastructure stands between the two.
That is locational marginal pricing, or LMP. It is the pricing mechanism behind every major wholesale electricity market in the United States, from ERCOT in Texas to PJM in the Mid-Atlantic, and understanding it is fundamental to understanding how the US grid actually works.
In this video, Modo Energy breaks down LMP from first principles. We start with transmission lines and their physical constraints, move through why West Texas often sees very cheap or even negative power prices while dense demand centres pay a premium, then unpack the three components that make up every LMP: energy, congestion, and losses.
We also cover what LMP signals mean in practice. Why consistently high prices in one area tell developers where to build next. Why everyone having the same idea leads to price suppression and cannibalisation over time. And why the locational model is generally seen as more efficient than zonal alternatives or the single system-wide price used in Great Britain.
TIMESTAMPS
00:00 Why electricity prices differ across locations
00:14 Transmission lines and their physical constraints
00:25 What happens when those limits are hit
00:44 LMP: locational marginal pricing defined
01:04 West Texas: lots of supply, limited export capacity
01:15 High demand centres: why prices rise
01:32 When transmission constraints bite: turning on the marginal generator
02:05 The three components of an LMP
02:11 Component 1: Energy — the system-wide cost
02:18 Component 2: Congestion — the transmission constraint effect
02:34 Component 3: Losses — electricity lost in transit
02:57 What actually drives prices most of the time
03:22 LMP vs zonal pricing vs a single system price
03:39 LMP as a market signal: where to build generation
03:57 The cannibalisation risk for battery developers
04:44 Why LMP is the dominant model across the US