Distributed Price Formation
Overview
Traditional electricity markets determine a single wholesale price for an entire market region.
Although this price reflects the balance between overall supply and demand, it contains very little information about the physical condition of the electricity network.
A household connected to a lightly loaded rural feeder may observe exactly the same wholesale price as another connected to an overloaded urban feeder.
From the perspective of the electricity network, these two situations are fundamentally different.
FP-AMM therefore abandons the concept of a single system-wide price.
Instead, every holon continuously computes a local price that reflects the scarcity of the resources under its control.
Prices emerge throughout the electricity network rather than being calculated at a single central location.
Every Holon Computes a Price
Each holon continuously estimates the state of the resources for which it is responsible.
Examples include:
- available generation,
- remaining network capacity,
- transformer utilisation,
- feeder loading,
- renewable surplus,
- local congestion.
Using this state estimate, each holon evaluates its own pricing function.
The result is a local price representing the scarcity of that particular part of the electricity system.
For example,
National System
£0.16/kWh
Transmission Region
£0.17/kWh
Primary Substation
£0.22/kWh
Distribution Feeder
£0.31/kWh
Household
£0.18/kWh
Each of these prices reflects scarcity at a different physical scale.
A Transaction Passes Through Multiple Holons
Every transaction affects multiple parts of the electricity network.
Consider an electric vehicle requesting to charge.
The requested power must pass through:
National System
│
Transmission Network
│
Primary Substation
│
Distribution Feeder
│
Household
│
Electric Vehicle
Each level independently evaluates whether the requested transaction can be accommodated using the resources under its control.
Consequently, every level also computes its own local scarcity price.
The Tightest Constraint Determines Price
Not every level of the hierarchy experiences the same degree of scarcity.
Suppose an electric vehicle requests additional charging.
The local prices become
| Holon | Local Price |
|---|---|
| National System | £0.15/kWh |
| Transmission Region | £0.18/kWh |
| Primary Substation | £0.24/kWh |
| Distribution Feeder | £0.39/kWh |
| Household | £0.17/kWh |
The feeder is currently the most constrained part of the electricity system.
Although generation is plentiful nationally, very little spare capacity remains on the local feeder.
The feeder therefore becomes the limiting resource.
The participant observes
£0.39/kWh
rather than the lower national energy price.
The local network constraint naturally dominates price formation.
Why the Maximum Price?
Every transaction must satisfy all constraints simultaneously.
If any single part of the network lacks sufficient capacity, the transaction cannot occur regardless of the availability elsewhere.
The exposed price is therefore
[ P_{\mathrm{final}}
\max \left( P_{\mathrm{national}}, P_{\mathrm{transmission}}, P_{\mathrm{primary}}, P_{\mathrm{feeder}}, P_{\mathrm{household}} \right) ]
The participant therefore responds to the tightest binding constraint.
No explicit congestion management mechanism is required.
The pricing architecture itself naturally communicates where scarcity exists.
Congestion Naturally Appears in Prices
Consider two neighbouring feeders.
Feeder A has abundant spare capacity.
Feeder B is approaching its thermal limit.
Their local prices become
| Holon | Feeder A | Feeder B |
|---|---|---|
| National | £0.16 | £0.16 |
| Transmission | £0.17 | £0.17 |
| Primary | £0.18 | £0.18 |
| Feeder | £0.19 | £0.42 |
Consumers connected to Feeder A continue observing relatively low prices.
Consumers connected to Feeder B immediately experience higher prices because local network capacity has become scarce.
The market therefore communicates congestion automatically.
No additional flexibility market is required.
Renewable Surplus Also Appears in Prices
The same principle applies during periods of renewable abundance.
Suppose strong wind generation creates a large national surplus.
The national price falls significantly.
National
£0.05
Transmission
£0.05
Primary
£0.05
Feeder
£0.06
Household
£0.05
Every participant connected through unconstrained infrastructure immediately observes lower prices.
Flexible demand naturally increases.
Electric vehicles begin charging.
Heat pumps increase output.
Batteries absorb excess generation.
Renewable curtailment is reduced without requiring central scheduling.
Prices Reflect Physical Reality
The distributed pricing architecture means that prices always reflect the most restrictive resource required to complete a transaction.
Sometimes this will be generation.
Sometimes it will be transmission capacity.
Sometimes it will be a local transformer.
Sometimes it will simply be the capacity of a household connection.
Participants therefore respond directly to the physical state of the electricity system rather than to a single market-wide average.
A Market That Mirrors the Network
One of the defining characteristics of FP-AMM is that the market architecture mirrors the physical architecture of the electricity system.
Every holon computes prices using the same pricing mechanism.
Every holon coordinates only the resources beneath it.
Every holon communicates scarcity through prices.
The final price observed by a participant is therefore not determined by a single central optimisation.
Instead, it emerges naturally from the interaction of prices throughout the holarchy, with the most restrictive constraint determining the final economic signal.
This creates a pricing architecture that scales naturally with the electricity network while ensuring that economic incentives remain aligned with physical reality.