Reactive Power Pricing in Deregulated

Electrical Markets Using a Methodology Based

on the Theory of Marginal Costs
V. Leonard0 Paucar, Senior Member, IEEE and Marcos J . Rider, Student Member, lEEE

Abstract-In this paper a flexible formulation about the In the generation exist another services with minor costs,
pricing of active and reactive power is presented. This proposal which are needed to hold the reliability of the system and
is developed using a decoupled formulation identifying the meet an adequate security. These services are called ancillary
active and reactive subproblems. A model for the price services and they are important for maintaining the integrity,
calculation of the reactive power which is intended to incentive
quality and operational security of the electricity service.
the participation of agents of the electricity markets is analyzed.
An optimal power flow (OPF) to solve the reactive power Ancillary services involve both generation, transmission and
subproblem which considers the production costs of the reactive distribution utilities, and the consumers. Recent discussions
power and the active losses minimization in the objective in the competitive electricity markets are related to the
function, has been implemented. In order to solve the OPF and economic cost to incorporate efficiently these services in the
consequently obtaining the active and reactive power marginal
regulatory framework. Currently it exists a growing interest
cost prices has been adopted a nonlinear programming
methodology. Tests using a 9-bus system for several load in the development of novel methodologies for the
conditionsshow the validity of the methodology. quantification of several ancillary services. Among these
ancillary services the reactive power support and the voltage
Index Terms-Reactive power pricing, competitive electric control in the transmission network is receiving a great
markets, deregulation of power systems. attention.
The theory of marginal costs given in [ I , 21 is used by
1. 1NTRODUCTlON
Baughman in [ 3 ] for the formulation of a novcl modified
URING the last decade almost all electrical power optimal power flow (OPF) which takes in account the balance
D systems around the world have been experienced equation of the reactive power for real time computation of
important changes in their structure. Those utilities integrated the reactive power marginal cost prices. A decoupled
in vertical structures and with regulated environments are modified OPF is proposed by El-Keib in [4), in that proposal
being substituted by utilities integrated in decentralized the objective of the reactive power subproblem is to minimize
environments in which the economic principle is the basis of the active power losses costs and then the reactive power
the open access electrical markets which at present conform prices may be computed. However neither of these methods
the competitive electricity markets (CEM). Thus, it is offer thc curve of the reactive power production cost.
necessary to take in account the concept of CEM in the The investment cost of new cquipments for reactive power
calculation of the remunerations and charges of the power compensation is included in the objective function in the
systems. proposal of Chattopadhyay et.al. [5] for computation of the
The development of the basic theory and practical analysis reactive power cost. Some applications for calculation of the
of electric power spot prices has been conducted by reactive power wheeling rates are reported in [6].
Caramanis etal. [I]. On the other hand Schweppe considers Another attempting for the reactive power cost
the spot price as the most attractive price in a competitive computation is due to Dandachi et.al. [7], in that reference it
electricity market, in particular in the generation stage, in is assumed a linear or a quadratic function for modeling the
which case the independent producers would adjust their reactive power cost of each generator in the problem of
generation according to spot prices and this price would be minimization of the total reactive production power.
the payment to the generation concessionaires due to their Nevertheless the definition of the reactive power cost curves
inherent power energy production [ 2 ] . In this context great is not clear.
attention has been devoted to the development of appropriate Hao and Papalexopoulos in [8] detail the use of the reactive
methodologies for the remuneration of the active power power services and demonstrate that the reactive power
generation. production costs should be included in the formulations for
the calculation of the reactive power cost prices. Some
V. L. Paucar and M. 1. Rider are with the Department of Electrical
methods for computation of the reactive power production
Engineering. Federal University of Maranhiio (UFMA), Slo Luis - MA, Brazil. cost have been proposed in that reference.
(E-mails: {Ipaucar; mjrider) @ieee.org).

7 0-7803-7107-0/01/$10.00 02001 IEEE

 Choi et.al. in reference [9] investigate the behavior of the 2) Eqrrcility Constraints
reactive power marginal costs through the maximization of The equation that characterizes the power flows over the
the social benefit whereas the reactive power production cost transmission network are expressed with the KirchhofFs laws
is minimized. and i n polar form are given by equation (2).
A formulation for the reactive power production cost
calculation is proposed by Lamont and FU [IO] and the
concept of opportunity cost is introduced. This terminology is
based in the generator capability curve, however the
opportunity cost computation is difficult. On the other hand
Gil et.al [ I I ] discuss the cost for generation of reactive power The mathematical expressions of equations (2) represent
as a function of active power losses in the generator. the active and reactive power balances, respectively.
There are several power systems, like for example for some
countries in South America, without ;in adequate , 3) Active Power Genemting Limits
management for the ancillary services payment. In order to
respond to he growing expansion of the power systems it is
, Active power generation
1
capacity of each generator is
restricted to its maximum and minimum limits as follows:
necessary the inclusion of adequate methods to quantify the p““” < p < pm<tx
ancillary services. h’, - g’ - x, (3)
in this work a decoupled version of the optimal power flow
in which are identified the active and reactive marginal cost 4 ) Trcinsrnission Limits
The transfer capacity of the active power flow is restricted
prices computation subproblems has been implemented. In
~

the objective function of the reactive subproblem is b’y the thermal limit of the transmission line as it is shown in
considered the reactive power production costs and the ecpation (4).
minimization of the total active power losses cost. For solving P,, 2 ?,Indx (4)
the decoupled OPF problem has been used a successive
quadratic programming technique with the Hessian matrix j 5) Definition ojactive power marginal cost prices
In accordance to the theory of marginal costs, the active
approximated as in the BFGS nonlinear optimization method
e w e r marginal cost price in the bus i is defined by equation
[ 121. The 9-bus test system of reference [ 131 has been used to
show the validity of the methodology. (7).

11. THEDECOUPLED
OPTIMAL
POWER
FLOWFORMULATION
The proposed methodology uses a decoupled optimal power I where L is the Lagrangian given in equation (6) which for
flow in which are defined the active and the reactive the optimization problem i t represents the total cost to supply
subproblems. It is intended that the decoupled formulation of the electrical energy for all consumers and subject to
the OPF gives more stable solutions. Moreover this decoupled oberation restrictions.
formulation originates that the active and reactive power
marginal cost prices be more comprehensive for engineering
purposes and the active and reactive components of the
marginal cost prices are easily identified [4]. Nomenclature of
symbols used in this paper are included in the Appendix.
A . The Active Power Subproblem
I ) Objective Function
The objective of the active power subproblcm is to find the
amount of active power produced by each generator to
minimize the total operation cost while the thermal limits of
the transmission lines and the maximum active power limits
of the generators are met.
The objective function of the active power subproblem is
given in equation (1). 6) Production Cost
I

,rx ! The cost for production of active power is modeled using a

Min Cj(P,; ) .
,=I
quadratic function given in equation (7) in which a, b, c are
coefficients determined by the respective concessionaires.
where Ci(P,J is the cost of the generator located in bus i to
produce P,qimegawatts. bp,, + cPx,
C ,(Px, ) = 0 i- (7)

8
 B. The Reactiive Power Subproblem
I ) Objective Function
The objective in the reactive power subproblem cdnsists on
the determination of: a) the optimum reactive power produccd
by all generators which minimizes the total operation cost,
and b) the optimum voltages in the generation buses which
minimize the cost of the active power losses of the system.
That objective has to meet the operation restrictions imposed
by the voltage limits in the buscs and the reactive power
limits of the generators. It is assumed that the minimization
of the cost of the power system active power losscs is
equivalent to the minimization of the cost of the active power
of slack generator. Thus, the objective function of the reactive
subproblem may be expressed as a nonlinear optimization 6) Production Cost
problem given by equation (8): The reactive power generation reduces the capacity to
produce more active power as it is inferred from the generator
capability curve (see Fig. I).
,=I
P
where C;(Q,;) is the cost to produce QKi megavars in the
generator located in bus i and CvdPvo) is the cost to produce
Pya megawatts in the slack generator.

2 ) Equality Constraints
These equations are similar to the set of equations ( 2 )
which represent the balance of active and reactive powers.
Q ? o
3) Reactive Power Generating Limits Fig. I . Loading capability diagram.ll4J
The reactive power generation of generator i has to observe
its maximum and minimum limits given by expression (9): The cost to produce reactive power is modeled considering
the financial loss when active power is not generated which
QF2 Qgi 2 QT' (9)
in this case is called opportunity cost [IO]. An approximation
4) Voltage Limirs for production cost is given in the equation (1 3).
Operational and technical conditions restrict all buscs
voltages magnitudes to be inside of an interval defined by the
maximum and minimum voltage values as it is shown i n
expression (IO).
V;""' 2 v, 5 V;','X ( 10)

In the present analysis has been adopted that the maximum

voltage limits are for example Vi))li"= 0.9 pu and V r = 1 . I
- W C

'
10.0625 230 L V 230 *V 10.8506 13.8 kV
I8 k V
~ . O ~ ~ o~ n. ~ O 8.8ii9+~n.i808
I ,
pu, i.e. a variation of k 10% of the nominal voltage which in 0 ; 812=]0.8745 812.18.1841
L
> I
this case is equal to 1.O pu.

5 ) Definition of reactive power marginal cost prices

In a similar way to the definition for the active power
marginal cost defined in equation ( 5 ) , the reactive marginal
cost prices is given by equation (1 I).

Those partial derivatives of equations ( 5 ) and ( I 1) may be

approximated by incremental values.
The Lagrangian formulation for this optimization problem
is given in equation (12).
's's kv t) '
Fig. 2. Unifilar diagram ofthe 9-bus test system. 1131

9
 The generation plants of the test system have been assumed
to be generating units whose production costs are represented
by quadratic functions as expressed in cquation (7). Those 32-
4b u s 3
-'+ b u s 4
+% b u s 5
i
costs are dependent of the fuel cost of each generator. 30- + bus6
Corresponding coefficients a, 0 and c, are given in Tablc 1. -+ bus 7
f 28- & bus8

TABLE I
PRODUC3lONCOST COEFFICIENTS

Cen Bus n b c P ~ ( M w )/'q'''''' (MW)

I 1 150 5.0 0.1100 250 IO

2 2 600 1.2 0.0850 300 IO
3 3 335 1.0 0.1225 270 10 .I

2 4 6 8 10 12 14 16 18 20 22 I
Hours ( h )
Fig. 4. Active power marginal prices.

In Fig. 5 is shown the evolution of the active power

marginal cost price for each generation bus vs. the active
power output of the corresponding generator.
1 34

32

-g 30

28

2 26
$?
24

5 22

20

18

0 . 6 , ' 4 I ' L ' '

2 4 6 8 10 12 14 16 18 20 22 24 60 80 100 120 140 160 180
Hours ( h ) Active power generation ( M W )
Fig. 3. Daily load Change. Fig. 5 . Active power generation prices vs. active power generation outputs

The decoupled optimal power flow problem has been
solved with a successive quadratic programming technique
and the Hessian matrix is approximated a s in the BFGS
methods [12]. In this way the active and reactive power
marginal prices for all buses can be efficiently calculated.
A. The Active Power Subproblem
By solving the active power subproblem with the original
data, the active generation powers are altered in order to meet
the restrictions and to minimize the objective function of this
subproblem. In this optimization stage the generation bus
voltages are considered fixed.
The variation of the active power marginal cost prices for
all buses of the test system in real time and during the
complete period of the daily load curve considered for this
simulation is shown in Fig. 4.
From these results it may be observed that the evolution of
the active power marginal prices is similar to the shape of the
daily load change. The active power marginal prices are in
the same order for all buses.
B. The Reactive Power Subproblein
All active power generation outputs, which have been
obtained with the active subproblem, will be used to initialize
the reactive power subproblem. In spite of the theory behind
this formulation, it may be argued that a typical output of a
solved unit commitment problem or any other methodology
which computes the active power outputs may be used to feed
the initial values for the reactive power subproblem.
The generation voltages and the active power in the slack
bus must be altered to meet the restrictions and to minimize
the objective function of the reactive power subproblem.
In Fig. 6 is shown the variation of the price in real time of
the reactive power for all buses during the complete period of
24 hours. it is possible to note that the reactive power
marginal cost prices are not in the same order as it occurred
with the active prices. Also the variations in the prices do not
have a relation with the daily load change.
In Fig. 7 is shown the reactive power marginal cost of each
generator as a function of its corresponding reactive output.

IO
 Qpi"~"~~,Q,~,""":Maximiim and minimum reactive powcr
output generated at bus i.
, . Active power flow over the transmission line
p , p.""".

-a- Bus6
ij and its maximum limit.
L

f: 8 - ++ Bus7 V y , V?'" : Maximum and minimum voltages at bus i.

z
>
-eB u s 8
CMgPi,CMgoi : Lagrange multipliers (equality restrictions)
6- [or active and reactive powers at bus i.
e
c, : cost function of generation plant at bus i.
A, p, v, q : Lagrange multipliers for active power
generation limit, reactive power generation
limit, voltage limits, and active power flow
limits, respectively.

2 4 6 8 10 12 14 16 18 20 22 24 ACKNOWLEDGMENT
H o u r s (h)
Fig. 6 . Reactive power marginal prices. The authors thank the Brazilian institutions CAPES and
Ill 1 CNPq for their support.

-1 0 0 10 20 30 40
R e a c t i v e power g e n e r a t i o n ( M V a r )
Fig. 7. Reactive power generation prices vs. re active power generation outputs.
1V. CONCLUSION
A model for the calculation of the reactive power marginal
cost price has been presented. This model used a methodology
based on an optimal power flow which has been decoupled in
the active and reactive subproblems.
For solving the OPF decoupled problem has been adopted a
successive quadratic programming technique in which the
Hessian matrix is approximated as it occurs in the second
order BFGS optimization method. The solutions of the
reactive subproblem were more stable and comprehensive.
Test results using a 9-bus system indicate that the reactive
power production cost and the minimization of the active
power losses should be considered in the objective function
for the calculation of the reactive power marginal prices.
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V. Leonard0 Paucar was born in Lima, Peru. He received his PhD degree in
APPENDIX electrical engineering from University of Campinas (UNICAMP), Brazil. He is
an Associate Professor at National University of Engineering (UNI), in Lima.
fxi, Q8i :Active and rective power generation at bus i. Peru. and at present is Visiting Professor at Federal University of Maranhlo
f d i , Qcfi:Active and rective power demand at bus i. (UFMA), Brazil. His research interests include the applications of artificial
intelligence techniques in power systems security and electricity markets.
V, , 4 : Voltage magnitude and angle, at bus i.
Y- 117 19.:
'I Element ij of admittance matrix, phase of Yip Marcos J . Rider was born in Lima, Peru in 1975. He eceived his BSc and PE
lib, ng : number of buses, number of generators. degrees in electrical engineering from National University of Engineering (UNI),
Peru. Currently he is working towards a MSc degree in electrical engineering at
f8Far,P R Y :Maximum and minimum active power output Federal University of Maranhio (UFMA), Brazil. His research areas are electric
generated at bus i. markets and applications of artificial intelligence in power systems.