Analysis of lost opportunity costs for hydropower under the locational marginal pricing mechanism

The development of electricity spot markets is central to China’s power sector reforms, with locational marginal pricing (LMP) serving as the dominant pricing mechanism. Originally designed for thermal-power-dominated systems, LMP faces adaptability challenges as markets become increasingly diversified, particularly with high shares of hydropower. In regions such as Yunnan, the current LMP mechanism has led to lost opportunity costs for hydropower participants, undermining their incentive to follow dispatch instructions. Therefore, this paper focuses on analyzing both the conditions under which LMP ensures hydropower participants’ compliance with dispatch instructions and the root causes of the lost opportunity costs incurred by hydropower in practice. First, this paper establishes a…