The Importance of Marginal Loss Pricing in an RTO Environment

With the formation of large RTOs and the move toward elimination of pancaked transmission rates, transmission prices need to reflect the increase in transmission losses as power moves across large geographical distances. In order for generators and consumers to receive correct short- and long-term signals with regard to transmission, the loss component should be accurately priced using marginal cost methods. Especially for systems with large fluctuations in power flows, and hence losses, it is necessary to implement a locational real-time pricing mechanism of real-power losses.