Why can nodal prices separate under congestion?

Assume a lossless two-area system. West has a generator offering at $10/MWh, East has a local generator offering at $80/MWh, East load is 80 MW, and the West-to-East interface can carry only 30 MW. Why can West and East have different marginal prices even though the cheaper generator has spare capacity?

Show hint

Price one additional megawatt at each location. Ask whether the next East megawatt can cross an interface that is already full.

Reveal worked explanation

The least-cost feasible dispatch imports 30 MW and serves the remaining 50 MW with the East generator.

East local dispatch = 80 MW − 30 MW = 50 MW

Lossless constrained dispatch

Location	Marginal resource	Modeled price
West	West generator	$10/MWh
East	East generator	$80/MWh

The interface is full, so another megawatt of East load must come from the $80/MWh local generator. Another West megawatt can still come from the $10/MWh generator. In this lossless model, the $70/MWh separation is the marginal congestion component; real locational marginal prices can also include losses.

Follow-up questions

• What happens to the two prices if the interface limit rises above East load?
• Which omitted network effects make a real nodal-price calculation more complex?
• What additional evidence would you need before attributing an observed market spread to one constraint?

Go deeper: Nodal pricing lesson →