LMP is an acronym for Locational Marginal Pricing, which reflects the value of electricity at a specific location at the time it is delivered and is typically expressed as prices per 15 minute time intervals. In deregulated electricity markets, LMP prices are representative of wholesale electricity costs set in both day ahead and real time markets and fluctuate based on market dynamics including generation availability, transmission availability, weather and customer behavior.
The LMP Index electricity product has become a common product structure since the advent of deregulated electricity markets. Rather than committing to a fixed price, a LMP Index contract indexes the electricity price to LMP prices, and the contract price is a formula of an LMP price plus a fixed retail adder.
Some clients use this purchasing strategy in hopes of achieving lower prices over time than offered by a fixed price product. Over periods of time, LMP prices may offer a lower cost, however there is significant risk as LMP prices are impossible to predict, and a client will not know his price until after the energy is consumed. Price spikes tend to happen unexpectedly, tend to coincide with peak usage periods and can lead to significant cost swings.
A potential benefit of an LMP product can be achieved if a client can implement load shifting. LMP prices are typically higher during peak usage periods (weekdays) and lower during off peak periods (nights and weekends). Clients who can shift consumption from on peak periods to off peak periods may realize lower costs.