Abstract: This paper presents a methodology to determine Locational Marginal Prices (LMPs) in electricity markets by integrating DC optimal power flow (DC-OPF) with loss factor modeling based on system distribution factors. The proposed framework combines detailed AC power flow simulations in DIgSILENT PowerFactory, used to calculate total system losses, with an optimization model implemented in Pyomo to capture the effects of transmission and generation constraints as well as marginal losses. Two DC-OPF models are formulated as follows: Model 1 without losses and Model 2 including loss factors derived from AC analysis. Results obtained for a simplified three-node system and the IEEE 39-node benchmark demonstrate that, under unconstrained conditions, LMPs converge to a uniform value, whereas transmission congestion introduces price differentials consistent with theoretical expectations. Incorporating marginal losses refines the pricing signals, ensuring a more accurate representation of real system operations. The proposed approach enhances computational efficiency while improving economic transparency, offering a robust tool for market operators and regulators to design and validate nodal pricing mechanisms.

Keywords: Locational Marginal Prices, marginal cost, loss factor, distribution factor, optimization, spot pricing

Pages: 147-161