IEEE Power & Energy Magazine - May/June 2016 - 55

prevent the penetration of wholesale prices into distributionconstrained areas such as import-constrained zones. In such
cases, local bids/offers or, in their absence, constraint violation penalties would establish the DLMPs within distribution constrained areas. This is the situation when the transactive control mechanisms such as transactive thermostats
and similar devices developed by and deployed in Pacific
Northwest are highly effective in establishing the DLMPs
based on local conditions.
To illustrate the impact of distribution constraints on
price signal propagation, let us consider a rather simple
example. The situation illustrated in Figure 2 involves a
DSO interfacing with an independent system operator
(ISO) at transmission substations for which the ISO determines LMPs, and a load zone within the DSO where an
autonomous prosumer [demand response (DR)/DERs] and
a transactive prosumer (DER resource) are located.
Assuming the wholesale market LMP is US$40/MWh,
the transactive prosumer offers discharge from its distributed storage at US¢8/kWh (US$80/MWh), and the autonomous prosumer reacts to its local price (DLMP). If the
distribution uplift is US¢3/kWh, distribution losses from the
transmission substation to the load pocket amount to 10%,
and for simplicity assume the distribution losses within the
load pocket are negligible and the distribution feeders are
phase-balanced. The question is: what is the DLMP as seen
by the autonomous prosumer?
✔ Case 1-Illustration of prices to devices in an unconstrained zone: Assume there are no distribution

operators, utility distribution companies (UDCs), DER providers, the DSOs and the bulk-power markets.

Pricing and Cost Allocation Under the
Transactive Energy Systems Paradigm
The locational marginal price (LMP) concept is the basis for
energy pricing, payment, and cost allocation in wholesale
markets. The notion of distribution LMP (DLMP) is being
explored for application to transactive exchanges within the
distribution system, among end devices and systems, and
between distribution/end device and bulk-power markets.
DLMPs may be long term (based on forecast of system evolution) or short term (before or after the fact based on bids
and offers or "prices-to-devices" mechanisms, which are
explained below). The long-term DLMPs are used primarily
to incentivize investments, whereas the short-term DLMPs
are used primarily for settlements among the transacting
parties or between the transacting agents and the transactive
market operator. Similar to wholesale markets, it is expected
that DLMPs may take on a range of values (highly positive
to zero or even negative) depending on the interplay between
prosumer and consumer utility functions (expressed in bids
and offers) and power system operational constraints.
The DLMPs may be established based on wholesale market LMPs, local bids and offers, or a combination thereof.
The prices-to-devices mechanism could be used to translate
wholesale LMPs into DLMPs, taking into account distribution losses and an uplift for distribution operation costs. This
mechanism is not workable when distribution constraints

Bulk Power
Markets
Price
Signals Schedules Schedules

Market
Price Signals
Schedules
DER Provider

UDC

DSO
Local Prosumer/Entity
Preferences

Schedules
Operator
Schedules
Market Instructions
Bilateral
Price Signals
Transactive
Bilateral
Bids and Offers
Transactive
Bids and Offers

Prosumers

Consumers
Microgrid

figure 1. Transactive agents and interactions.
may/june 2016

ieee power & energy magazine

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