Reactive Power Pricing
Komal Sethi
Electrical Department
Chitkara Institute of Engineering & Technology, Rajpura
kml.sethi@gmail.com
Abstract—This paper explores the technical and economic issues
of determining reactive power pricing structures in an open-
access environment. It is believed that reactive power pricing
and management under open-access will depend upon two
important developments: 1) the functional unbundling of
facilities that support the reactive power and voltage control
service, and 2) grid rules to facilitate the coordination
between generation and transmission for reliable system
operation. In this work a methodology to calculate prices
based on the theory of marginal costs of active and reactive
power and in techniques of decoupled optimization is
presented. It is put forward in a brief way the present trend in
dealing with the reactive power, the situation in the argentine
market, the main methodological state and some results of
applications on the Argentine high voltage power system (SADI).
Keywords— Reactive Power Pricing, Decoupled Optimal Power
Flow, Real-Time Pricing, Reactive Power Market, Transmission
costs.
I. INTRODUCTION
Reactive Power Pricing is a method which is used to provide
an adequate compensation to the utilities for generator
supplied reactive power. Real time pricing of the active power
is an area of intense research at present. Although, real time
pricing of the active power is closely related to the reactive
power, unfortunately pricing of the reactive power has
received very little attention.
Reactive power has a profound effect on the security of the
power system because it affects voltage throughout the system.
Adequate reactive power support and voltage regulation
services are required by the system to enable secured
transaction. It ensure that the voltage throughout the system is
maintained at a constant level under both normal and
emergency conditions to prevent loss of the load and to keep
the system reliability at an acceptable level .The amount of
reactive power that must be supplied for each transaction must
meet the reliability requirements of maintaining transmission
voltages within the limits accepted in the region. Besides
simply satisfying the reactive power need of the system,
additional reactive power reserve must be reserved too protect
the integrity of the system. The reactive power service is one
of the control area services that must be in place to make the
provision of electric services possible.
Cost of the transmission system facilities are recovered
through a transmission rate as a result of monopoly of the
transmission function. Most transmission utilities already
include embedded cost booked for transmission in their basic
transmission rate structure. It means that the transmission
consumers are charged for the reactive power support service
based on the cost of transmission equipment. In contrast cost
incurred by generation facilities to support the transmission
service must be recovered from ancillary service charge
mechanisms. Since the system operator will continue to
depend on generation suppliers to provide ancillary services,
the operator will need to determine the requirements for
reactive power and coordinate services to meet these
requirements . The Federal Energy Regulatory Commission
(FERC) recently proposed that the ancillary services be
provided at a rate reflecting the embedded costs incurred by
the utilities for wholesale transactions.
II. OBJECTIVE OF REACTIVE POWER PRICING [2]
Analysing the costs of providing reactive power services and
establishing an appropriate price structure are important both
financially and operationally for the deregulated electric
industry. In an open access competitive electricity system,
good reactive power pricing scheme should fulfil the
following functions and general objectives.
Allow the providers of reactive power service a fair
chance of earning normal profits on these services.
Produce correct price signals that will encourage the
service providers to improve economic efficiency. With
the proper pricing and costing of reactive power, the
service providers will have the ability to make intelligent
decisions about economic activities such as energy
transactions, investments and asset utilization.
Provide incentives to efficiently site reactive power
devices.
Produce accurate price signals that will encourage the
customers to make efficient choices about how they use
or conserve reactive power.
Be non-discriminative
Be simple and transparent to gain wide acceptance.

The efficiency and reliability of the system will be improved
when well-balanced reactive power sources are available to
support the transmission network, since active power losses in
transmission system will be reduced by properly distributing
reactive power generation.
III. REACTIVE PRICES AND MARKETS [2]
A. Technical and Economical Aspects
In order to establish adequate prices for the reactive power
multiple objectives should be taken into account and analysed.
They include technical and economical considerations, such
as maintaining system reliability, providing correct signals for
system expansion and ensuring equity among market agents.
The most important aspects, which affect the management and
valuation of the reactive power are:
Reactive power reserves.
Inductive and capacitive reactive power.
Static and dynamic reactive power.
Reactive power capacity and production costs.
1) Reactive Power Reserves
Reactive power reserve is a basic requirement for
maintaining voltage reliability and therefore should be
considered in the pricing structure. Besides simply
satisfying the reactive power needs of the system,
additional reactive power capacity must be reserved to
protect the integrity of the system against unforeseeable
contingencies and sudden changes of reactive power
requirements.
2) Capacitive and Inductive Reactive Power
Reactive power requirements for transmission services
are heavily dependent on system conditions, and
calculations of the total requirements should include
both inductive and Capacitive reactive power. During
peak hours, transmission lines are heavily loaded and
this in turn leads to large inductive reactive power
losses. To accommodate these losses, generators are
usually producing reactive power continuously and
capacitor banks are turned on so that there is sufficient
reactive capability to maintain the reactive power
balanced and keep voltages within specified limits.
3) Dynamic and Static Reactive Power
Voltage and reactive Power control are managed through
a dynamic Process. The equivalent "AGC" function for
reactive power is achieved by using voltage regulating
devices associated with generators, static var
compensators (SVC), and synchronous condensers. They
are more valuable to transmission operators since they
have the ability to continuously adjust their reactive
power output to regulate voltages at the controlled
buses to desired values. In contrast, most of the
manually switchable devices, such as the capacitors and
reactors, are designed to have a limited number of
switching operations and cannot respond to reactive
power changes instantaneously. These devices act as the
"base load” units.
4) Reactive Power Capacity and Production Costs
Traditional cost analysis of generation mainly deals with
aspects of generator capacity and production costs.
However one fundamental difference that sets apart
reactive power from active power in terms of costs is that
the variable costs of producing reactive power are
often negligible. Consequently, the charge for reactive
power should be determined by the availability of
reactive power capacity. In the British system, about 80
percent of reactive power costs are recovered from the
reactive power capacity payment and the rest from the
actual reactive power production. To simplify the
administration of the reactive power charge and
prevent gaming in real-time operations, such as creating
circulating VAR flows in the system, it may be
preferable to have all costs recovered from the capacity
related payment.
IV. REACTIVE POWER PRICING METHODS[3]
A. Pricing Structure Based on Performance Requirements
The performance based pricing structure establishes a
reactive power standard for all reactive power load and
Standards generation within a control area. Defined by the
system operator, the performance standards specify the
reactive power responsibilities and limits for all suppliers
and load. For example, the performance standards may
specify the limits for reactive power generation in terms of a
demand for a load or the reactive power generation by a
generator is within the allowable bands. The system
operator directs the real-time operation of reactive power
production by specifying the desired voltages that need to be
maintained by the generators. In addition, a penalty structure
for violating the performance standards and a credit structure
for making available extra reactive power capacity need to be
in place.
The system operator needs to consider several requirements in
specifying the reactive power performance standards. First,
the limits set for reactive power consumption should be
technically feasible and suitable for accommodating different
operating conditions. Possibilities are to define reactive power
limit range or to specify the ranges based on the maximum
and minimum requirement of the peak and off-peak loads.
Second, reactive power limit to the load should be related to
the active power usage of the transmission system.

B. Pricing Structure Based on Local Reactive Power Markets

A transmission customer should have choices for

supplying portions (or the entire amount) of the
generation-related reactive power needed for supporting its
transactions, to the extent that it has the capability of doing
so. To overcome this problem, the development of the local
reactive power market should be encouraged. In this market,
generators, loads, or any other third party may participate.
The generators may be credited according to their reactive
power capacity and load customers may be charged
according to ,the total reactive power requirements due to
the load demand. To simplify the administration of such a
reactive power charge, a zonal based charge can be developed. Where, it number of network buses and Ng: number
Of course, if the transmission customer elects to self- of thermal generating units.
provide reactive power, the service must be coordinated
with the transmission provider.
2) Reactive Model
V. PROPOSED METHODOLOGY[1]
At this stage the losses function is incorporated as
A. Optimization Model objective function. Constraints are power flow
balances, limits on the reactive generation, on
The problem to be solved is considered as an optimization voltage magnitudes and current limits. Problem
model of two stages: active and reactive models. Basically, variables are the generating reactive powers and
each one counts with an objective function, its constraints and nodal voltages.
control variables. In the active model (STAGE I) the
minimization of the operation costs function (fuels) of thermal
units is considered. In the reactive model (STAGE II) it is
introduced the minimization of active transmission losses in
all network branches (lines and transformers). In both models
are included as constraints physical and operational power
system limits: power flow balance, thermal capacity and
stability, voltage. As variables are included active and
reactive generating powers and nodal voltages. In each
model the respective objective function, constraints and
variables are considered.
In order to calculate the nodal prices of active and reactive
power it is formulated a non-linear problem using a Lagrange
modelling. The proposed methodology allows obtaining prices
in two solution stages. The Lagrange formulations for the
active model (STAGE I) and for the reactive model (STAGE
II) are here in after presented.

1) Active Model

At this stage the operation costs function is used
as objective function and the power flow
balances, limits on active power generation, on
active power transmission and current limits
participate as constraints. The problem variables are
the generating active powers and the phase angles.
In the active model, the Lagrange multipliers ppi
represent the marginal costs of supplying active
power in the bus i. The final active power prices p i
are determined exactly at this stage having into
account these multipliers ppj and the active flow qii
and current limit vii multipliers that result active.
B. Developed Model
The developed methodology to determine prices consists of an
optimization procedure inserted in an iterative scheme of
calculation. The problem starts with a load flow calculation
for a topology, demands and dispatches, corresponding to a
given period (FLUCAR Module). Violated constraints are
detected. Then, with that information the decoupled
optimization problem is formulated in two stages. First, the
active power model is solved (STAGE I) and then that of
reactive power (STAGE II) including only the set of violated
constraints and the power flow balances (OPTIMA Module).
Fig1:- Developed methodology structure
Finally, the operation state is updated and then the possibility
of new violations is verified.
VI. RESULTS
The developed methodology is applied on the Argentine high
voltage power system (Sistema Argentino de Interconexion -
SADI). At the first researches the 500 kV HV network has
been modelled. Regional networks, the thermal and hydraulic
generation and the load have been considered as equivalent in
buses of 500 kV. The modelled network has 80 buses, 58 lines,
98 transformers, 6 series capacitors and 199 generating units.
Figure 2 shows the Argentine power system.
The developed methodology has been validated with
sensitivity analysis to the demand, dispatches, voltages
and transmission limits.
Fig3:- Active power prices (STAGE I)
In this work are firstly presented as example the results of
active and reactive prices obtained for three load states
(PEAK, REST and VALLEY) of a winter week. Values are
shown only for the 43 buses of 500 kV of the SADI. Active
power prices obtained at STAGE I are shown in Figure 3.
Values of reactive power prices, obtained at STAGE I
using the operation cost function, are shown in Figure 4.
Fig4:- Reactive power prices (STAGE I)
Finally, reactive power prices obtained at STAGE II, with
the transmission losses function, are observed in Figure 5.
Differences can be seen between the results found in both
STAGES.
Fig5:- Reactive power prices (STAGE II)
Comparing the resulting reactive prices of Figures 4 and 5 it is
observed that they are smaller in all cases of the decoupled
model STAGE II, i.e. when the function of transmission
losses minimization is used. The coupled model, equivalent
to STAGE I, only with the function of operation costs
minimization gives greater reactive prices. In the reactive
optimized situation of Figure 5, greater negative prices are
also observed.
Finally, with those values calculated hourly for winter and
summer, are shown, as example, the transmission costs
accumulated for a typical winter and summer month and
the final values for a complete year. These costs were
calculated having into account all transmission components of
the studied power system, its nodal prices and respective
transferred energies. The expressions used in the calculation
of active and reactive transmission costs on a given line i are
respectively the following:
It is observed, in general, that reactive transmission costs
result smaller when the network is optimized from the reactive
point of view (values calculated with decoupled model,
STAGE II). These smaller values are integrated in the
time having into account the positive and negative
variations of those costs.
CONCLUSION
A methodology for reactive power prices calculation
spatially and temporally differentiated is presented in this
work. A decoupled optimization model is presented. It
includes a minimization of operation costs and a minimization
of transmission losses. Differentiated reactive prices provide a
more equitable tool for the calculation of charges and
penalizations for different agents of a competitive power
market. They can be the basis to form a reactive market
structure. Results of active and reactive power prices and
transmission costs are presented and discussed. A monthly
and yearly comparison of transmission costs for active and
reactive power is presented. The methodology put forward
allows a more clear identification of responsibilities in the
consumption or production of reactive power and it could
allow the development of a more efficient reactive
valuation proposal having into account the security and
economy in the operation.
ACKNOWLEDGEMENT
The author acknowledges the support provided by Dr.
Archana Mantri (Director Academics, CIET)and project
Guide Ma.Anu Singla(HOD,EE Deptt. CIET).The Department
of Electrical Enginnering at Chitkara Institute of Engineering
and Technology was an outstanding unit to work with.
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[1] K.K. Mandal, Member, IEEE, B. Kar, Member, IEEE, D.

Pal, Member, IEEE, Reactive Power Pricing in a
Deregulated Electricity Industry.

[2] Victor M. Doiia' and AndrCs N. Paredes Reactive

power pricing in competitive electric markets using the
transmission losses function.

[3] Shangyou Ha0 Alex Papalexopoulos Reactive Power

Pricing and Management