Congestion costs represent the price of congestion at binding constraints on the power system. Congestion costs arise when, in order to respect constraints in the transmission system, higher cost generation must be used to meet load as opposed to lower cost generation that would otherwise be used in absence of the constraint.
As a simplified example, let’s say you live in a neighborhood that requires a certain amount of power. There is a low-cost power plant far away that is large enough to power your entire neighborhood; however, there are only enough power lines between the power plant and your neighborhood to supply power for half of the power your neighborhood needs, the rest of the power must be supplied by a higher cost power plant that is closer to the neighborhood.
The difference between the dispatch costs at the lower cost plant and the higher cost plant would be considered the congestion component of LMP in your neighborhood.
Source: Energy Acuity LMP Platform
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