A comparative study of marginal loss pricing algorithms in electricity markets

Abstract Due to the development of new technologies, change of generation mix and appearance of newly formed energy supply hubs, there is a large year‐on‐year change in the marginal loss factors in power systems. Since any change of marginal loss factors could have significant impacts on payment of loads and profitability of generators, it is necessary to carry out a comparative study on the loss factor‐based locational marginal pricing methods. Considering that a systematic comparison of various locational marginal pricing methods has not been reported in existing publications, this work presents a comparative study of the loss factor‐based locational marginal pricing methods that are widely adopted in electricity markets. Advantages and disadvantages of each locational marginal pricing method are explored in detail, and could serve as references in selecting appropriate locational marginal pricing methods in practice. The selected five locational marginal pricing models are tested in two standard power systems, that is, the IEEE 5‐bus and 39‐bus systems. Then, through numerical experiments and detailed analysis, key findings about the reference point dependency of loss factors, accuracy of loss estimation, load payment, generation income, and market settlement surplus are summarised and elaborated. It is found that marginal loss factors‐based locational marginal pricing methods tend to produce a higher market settlement surplus and can lead to a lower generation income than other locational marginal pricing methods