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Published in IET Generation, Transmission & Distribution

Received on 23rd August 2007
Revised on 3rd December 2007
doi: 10.1049/iet-gtd:20070370

ISSN 1751-8687

Towards reactive power markets

Part 2: differentiated market reactive power requirements
K.L. Lo Y.A. Alturki
Department of Electronic & Electrical Engineering, University of Strathclyde, Glasgow, UK
E-mail: cnas0l@eee.strath.ac.uk

Abstract: Two major contributions are discussed in this part of a two-part set. First, it presents a new concept of
market reactive power requirement (Qreq) for every participant in both bilateral and pool markets. This Qreq is
defined as the reactive power loss allocation to each bilateral transaction using current adjustment factor (CAF)
method that has been proposed in Part 1. When a transaction is allowed to provide reactive power more than
its Qreq , it contributes to system reactive power needs and it is considered a reactive power provider. On the
other hand, if it cannot produce its Qreq , it relies on other reactive power sources to ship its contracted
power and it is considered a reactive power consumer even though it may generate some reactive power.
The concept then is extended to participants in a pool market. Secondly, this paper proposes a new general
concept of differentiated reactive power requirements for every participant in electricity markets. It assumes
that Qreq of a participant depends on its allocated losses using any appropriate loss allocation method.
The proposals help system operators and market participants to trade reactive power as well as real power
effectively and fairly. The simulation results show validity and consistency of the proposals.

1 Introduction
Reactive power plays an important role in power system
reliability and security. It maintains voltage profile and
improves real power transfer capability. Since the
deregulation of energy markets has started, pricing of
reactive power as an ancillary service has become an active
area of research. In a vertically integrated power system,
the utility calculates the whole cost of 1 MW to be
transferred from sources to end users. This cost includes
the cost of reactive power as embedded cost. In deregulated
energy market environments, ancillary services such as
reactive power and reserves are open for competition. This
paper contributes to developing reactive power markets by
proposing a new concept of Market Reactive Power
Requirement (Q req) for every market participant. The
proposal is built on Current Adjustment Factor (CAF)
method proposed in Part 1 of this two-part set [1].
Most reactive power pricing proposals are based on
reactive power costs which might be determined directly
or through market processes [2]. The authors in [3]
classify these costs into explicit and implicit costs. The
explicit costs include fixed costs and maintenance and
operating costs. The implicit costs include any
opportunity costs of lost profits of real power in order to
produce reactive power instead. Some proposals divide
cost of reactive power into two major components; the
first one is incurred from generators and the second one
is incurred from transmission. Generator costs include
explicit (capital) and implicit (opportunity) costs. The
second incurred cost is that of transmission which is
explicit cost only consisting of losses, cost of capacitors,
transformers and compensators [4, 5]. While fixed costs
of equipments that only manages reactive power are easy
to determine, it is not straightforward for generators.
Alvarado et al. [2] listed several proposed methods in the
literature to quantify the portion of fixed cost that was
allocated to reactive power.
Many methods for reactive power pricing are based on
locational marginal pricing scheme either neglecting
production cost or taking into consideration the
production cost and/or other transmission equipments

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costs [6, 7]. Optimisation theories are the main
techniques used to determine spot prices for real
power and reactive power by modifying optimal power
flow (OPF) to include reactive power costs. These
schemes use the modified OPF to price reactive power
at each node.
Some proposed methods are based on reactive power
valuation [8, 9]. These methods propose to base
reactive power in a different way trying to value its
effect on system security and reliability which are the
main functions of reactive power in a power system in
addition to load reactive power requirements. Among
reactive power valuation proposals are equivalent
reactive compensation (ERC), back-up generation, PV
curves and voltage sensitivities (VS) methods. ERC and
back-up generation methods look at other
reactive power sources’ response to a particular source,
which can be viewed as a measure of the value of that
source’s output. PV curves and VS methods look at the
reactive power sources response to load changes. A
monetary model of reactive power compensation can
be based on the reactive power value of each source.
Other literatures propose to base reactive power
pricing on power flow tracing [10– 12]. These schemes
start from a solved power flow. They determine the
power that can reach each bus by each generator. Buses
that are fed by the same generator are determined.
Using proportionality assumption, which is neither
provable nor disprovable, each generator is assigned its
share of loads and branch flows. Under these proposed
methods, the consumers and generators do not have
any control on the price they would be charged because
the method outputs determine exactly every load that
can be reached by a generator and by how much. In
other words, output of a generator is delivered to
certain loads and each load obtains its power from
certain generators according to the calculated results
based on power-flow tracing.
A minimum amount of reactive power (Q min) required
from every generator in a pool system in order to ship its
active power is proposed in [13]. Q min is defined as the
minimum amount of reactive power needed from each
generator in order to transmit its own real power
without the help of other reactive power sources in the
system. In other words, it is the amount of reactive
power when produced by a generator, it neither
enhances nor reduces the voltage stability margin of the
base case, which can be measured by PV or QV curve
margin. The base case is defined as the case when the
generator under consideration outputs zero real and
reactive power. The corresponding voltage stability
margin is the reference margin. The power mismatch
caused by setting the output of the test generator to
zero is produced by re-dispatching other generators
using different re-dispatching schemes such as OPF,
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proportional sharing or operating guides. For a given
real power output from the test generator, Q min is the
generator reactive power output that brings back the
voltage stability margin to the reference margin. Since
it is possible that certain generators can not supply their
minimum required reactive power, due to system
constraints or the capability curve limits of the
generator, these generators actually draw some reactive
power from the system to be able to transmit their own
active power. In such circumstances, these generators
cannot support the system even though they
are generating some reactive power. This method
proposes that reactive power compensation should be
paid only for the amount of reactive power
produced that is above the minimum required reactive
power.
This paper is Part 2 of a two-paper set. Part 1 proposed
current adjustment factor (CAF) method to allocate every
transaction in bilateral markets its share of the real and
reactive power losses [1]. Different power transmissions
cause different real and reactive power losses on the
network depending on system operating conditions and
network topology. Remote generators from load center
are expected to cause more reactive power losses and
thus are expected to need more reactive power help,
than closer ones. CAF method effectively and fairly
allocates each transaction its share of the losses as
illustrated in detail in [1, 14]. Since CAF method starts
from a solved load flow (base case) where all
transactions declare their shares of the market and all
system conditions are satisfied, the resulted allocated
losses covers all system needs of reactive power. Every
bilateral transaction Ti is responsible for its allocated
reactive power losses (Q Tiloss). So, Q Tiloss is the required
reactive power participation from each transaction,
respecting all system constraints, in order to compensate
its allocated losses. If a transaction can not fulfill its
required reactive power participation, due to either the
capability limits of its generator or the system
constraints, it relies on other reactive power sources to
make up its allocated losses for which it should be
responsible. This introduces the proposed concept of
market reactive power requirement (Q req). For a
transaction, Q req is defined as the minimum reactive
power output required from a generator (or a group of
generators) that is involved in the transaction in order to
compensate its allocated losses. So, Q req from a
transaction is equal to its allocated reactive power losses
resulted from CAF method. The system operator is
responsible for maintaining system voltage profile which
is the main function of reactive power support. Each
generator produces an amount of reactive power
according to the instructions of the system operator. If a
transaction generator (the generator that is involved in
the transaction) is instructed to produce reactive power
that is less than its Q req , it would need to depend on
other reactive power sources in the system to
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compensate for the losses it caused and the transaction is
considered as a net reactive power consumer, that is, it
actually draws some reactive power support from the
system. On the contrary, if a transaction generator is
allowed to produce more than its Q req , it supports the
system and it is considered as a net reactive power
provider.
The concept of Q req is extended to pool markets by
which every participant, including loads and generators,
is assigned its requirement of reactive power
participation.
This paper also introduces a new general concept that
assigns each participant in electricity markets its own
reactive power obligation which can differ from other
obligations of other participants. The concept assumes
that the reactive power requirements of participants
depend on their reactive power loss allocations using
any appropriate loss allocation method.
The rest of the paper is divided into four sections.
Market reactive power requirement concept in bilateral
markets is introduced in Section 2, the application of
the proposed concept in pool markets is presented in
Section 3, case studies of both bilateral and pool
markets are presented in Sections 4 and 5 respectively,
generalisation of the proposed concept is introduced in
Section 6 and finally the conclusion is in Section 7.
2 Market reactive power
requirement (Qreq) in bilateral
markets
CAF method allocates each transaction its share of the
system reactive power losses. This paper introduces the
concept of market reactive power requirement (Q req)
which is defined as a portion of the whole system
reactive power losses for which each bilateral transaction
is responsible. Q req for a transaction Ti is equal to its
allocated reactive power loss, that is, Q req and the
allocated reactive power loss to a participant are equal.
A transaction generator should produce an amount of
reactive power that equals to Q req in order to
compensate the losses that it causes without relying on
the help of other reactive power sources in the system.
Because of the locality nature of reactive power and the
capability limits of each generator, it is possible that
some generators can not fulfil all their allocated reactive
power losses whereas others are instructed by the
system operator to participate in reactive power more
than their allocated losses in order to maintain system
security and voltage profile. If a generator is instructed
to produce more reactive power than its Q req , it
supports the system and and it is considered a net
reactive power provider. On the other hand, if it
produces less reactive power than its Q req , other
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reactive power sources available in the system actually
produce the remaining allocated reactive power and the
transaction is considered a net reactive power consumer.
So, it is possible that some generators are considered as
reactive power consumers even if they are producing
some reactive power as their productions are less than
their Q req . It should be noticed here that the reactive
power outputs of generators are determined by the
independent system operator to maintain voltages within
limits and to respect all system constraints.
So, a transaction reactive power support can be
defined as follows
T T T Ti
i
Q Support ¼ Q Inji
Q Alloc
i
losses
Q cont (1)
where
Q TInji ¼ the reactive power provided by generators
involved in transaction Ti
Q TAlloc
i
losses ¼ the allocated losses to transaction Ti
using CAF method
Q Tcont
i
¼ the contracted reactive power traded by Ti
A transaction should expect payments for its reactive
power support if its Q Support is greater than zero. On
the other hand, a system operator should charge a
transaction if its Q Support is negative. It is assumed here
that the system is operating under heavy loading
conditions, that is, the system needs reactive power
production to maintain bus voltages. It is worth noting
here that for equipments that are dedicated for reactive
power support such as synchronous condensers have
always positive Q Support as they are allocated zero
losses and they have no contracts for reactive power
demands (i.e. their reactive power outputs are solely
for system reactive power support.)
Q req concept has important features, as it will be
illustrated in case studies, such as: (1) it takes into
consideration the locality nature of reactive power; (2) it
sends clear signals to transaction parties about the
impact of their contracts on the system; (3) it sends
correct signals about where reactive power support is
needed more and where there is excess of it; (4) it
provides a basis of competitive environment for reactive
power procurement; (5) it provides opportunity for
generators to optimise their real and reactive power
outputs to maximise their profits; (6) it creates
incentives for reactive power participation and for new
participants to enter the market at the right location.
Market reactive power requirement (Q req) concept
in bilateral markets is illustrated first on a simple two
bus system. Then it is verified on IEEE-14 bus system.
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3 Market reactive power It is worth noting that, in addition to the advantages

mentioned in the previous section, the proposed concept
requirement (Qreq) in pool markets assigns both loads and generators their Q req according to
To apply CAF method in pool markets, the method is their utilisation of the system by which there is no need
modified by using an economic despatch technique for an arbitrary sharing percentage such as 30% for
instead of load flow calculations. It allocates every user, generators and 70% for loads.
generator or load, its share of real and reactive
power losses. Every participant Ti , whether a load or Market reactive power requirement (Q req) concept
a generator, is responsible for its allocated reactive in pool markets is illustrated first on a simple two bus
power losses (Q Tiloss). So, Q Tiloss is the required reactive system. Then it is verified on IEEE-14 bus system.
power participation from each participant, while
respecting all system constraints, in order to fully
compensate its allocated losses. If a participant can not 4 Determination of (Qreq) in
fulfill its required reactive power participation, which is bilateral markets: case studies
possible due to its capability limits or due to system
constraints, it relies on other reactive power sources 4.1 Simple two bus system for illustration
available in the system to make up its allocated losses Consider the system in Fig. 1 where the system voltage
for which it should be responsible. This introduces the is fixed at 1.0 pu at all buses. Within the system, all
concept of market reactive power requirement (Q req) generators and loads are represented by G (System)
in pool markets. (Q Treq i
) is equal to the allocated and Load (System), respectively. Generator 2 has a
reactive power loss to participant Ti using CAF method. transaction with load 2 that is located within the
system. All other transactions are represented by
A participant Ti should produce an amount of reactive transaction one (fixed at 100 MW) which is between
power equal to Q Treq
i
in order to compensate the losses it G (System) and Load (System). It should be noticed
causes on the network without relying on the other that the transmission line solely serves generator 2
reactive power sources in the system. Because of the (carrying its contracted real power to load 2) implying
locality nature of reactive power and the capability that all the transmission losses are caused by generator
limits of each participant, it is possible that some 2 for which it should be solely responsible. Notice
participants can not fulfil all their Q req whereas others also that there is no contracted reactive power, so,
are instructed by the system operator to participate in Q Tcontracted
i
in (1) is zero in this case study simulations.
reactive power needs more than their Q req in order to
maintain system security and voltage profile. If Q Treq
i
is Three scenarios are conducted to illustrate the proposed
less than what participant Ti produces, the participant concept. Scenarios one and two assume that the traded real
supports the system and is considered a net reactive power of transaction 2 is 200 and 300 MW, respectively.
power provider. On the other hand, if it produces less Scenario three assumes that generator 2 is farther away,
reactive power than its Q Treq i
, the system actually that is, Z ¼ 0.02 þ j 0.3 pu instead of Z ¼ 0.01 þ j
produces the remaining allocated reactive power and 0.1 pu. In all scenarios, the setpoint voltage of generator
the participant is considered a net reactive power 2 changes from 0.9 to 1.1 pu in 0.01 steps.
consumer even if it is producing some reactive power.
So, Q Support of each participant in a pool market is 4.1.1 Scenario 1: Transaction 1 and 2 are fixed at 100
determined as follows and 200 MW, respectively. The simulation results are
shown in Figs. 2 and 3. Point A in Fig. 2a deserves
T T T attention. When the setpoint voltage of generator 2 is
i
Q Support ¼ Q Inji
Q Alloc
i
losses (2) less than A (about 1.04 pu), G(System) injects reactive
power which flows from System towards Bus 2. This
where Q TInji is the reactive power provided by participant Ti . means that G(System) participates in reactive power loss
If a load Ti consumes lagging power factor demand, Q TInji will compensation on the line. As the setpoint voltage of
be negative whereas if it consumes leading power factor
demand, Q TInji will be positive. On the other hand, Q TInji
for a generator is positive if it injects reactive power and
it is negative if it absorbs reactive power. Q TSupport
i
defined
in (2) assumes heavy loaded conditions, that is, the
system needs reactive power production to maintain
voltage profile. A participant Ti is considered a reactive
power provider only if Q TSupport
i
is greater than zero. On
the other hand, a system operator considers a participant Figure 1 Simple two bus system for illustration (case study
a reactive power consumer if its Q TSupport
i
is negative. in Section 4.1)

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Figure 2 Reactive power flow and injections results of scenario 1
a Reactive power injection at bus 1
b Reactive power injections from generator 2 and System
generator 2 increases, its reactive output increases and the
reactive injection from System decreases. At point A,
G(System) injects zero reactive power to the line
which means that generator 2 compensates all the
losses created on the line. This also means that the
setpoint voltage of generator 2 has to be at least 1.04 pu
to transmit its 200 MW without any help
from G(System). The corresponding reactive power
injection of generator 2 in Fig. 2b is the minimum
required reactive power participation (Q req) in order to
transmit its 200 MW real output. If the generator
produces less than this amount, the transaction requires
help from other reactive power sources within the
system whereas if it generates more than Q req ,
it provides excess reactive power to support the system.
At point B, both generator 2 and G(System) provide
half of the reactive power needed on the line.
Figure 3 Reactive power support from generator 2 and
System
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At point C, generator 2 outputs zero reactive power and
depends fully on reactive power help of other sources
within the system to compensate the transmission
reactive loss.
Fig. 3 shows the results of applying (1) to calculate
reactive power support of transaction 2. These results
are consistent with Figs 2a and 2b with identical ‘A’
point value. When generator 2 is operating at a
setpoint voltage larger than A, it generates reactive
power more than its allocated reactive power losses
(i.e. line reactive losses) and thus reactive power flows
into System. This can be seen as negative flow in
Fig. 2a (where reactive power flow is negative when
System bus receives reactive power from Bus 2) and
System negative injection in Fig. 2b ( where a reactive
power injection is negative when it is absorbed by a
generator).
4.1.2 Scenario 2: Scenario one is repeated when
generator 2 trades 300 MW instead of 200 MW. As
the results show in Figs. 4 and 5, generator 2 now
needs more help from other reactive power sources to
transmit its real power output. In other words,
generator 2 has to inject more reactive power (higher
setpoint voltage) to be able to ship its contracted real
power without any help from other sources within the
system. When compared with the results of scenario
1, it is noticed that point A has moved to the right
(i.e. higher setpoint voltage), Q req has increased and
the amount of reactive power with which generator 2
can support System is reduced. This is consistent with
engineering expectation and locality nature of reactive
power.
4.1.3 Scenario 3: Scenario one is repeated
when generator 2 now is farther away, that is,
Z ¼ 0.02 þ j 0.3 pu instead of Z ¼ 0.01 þ j 0.1 pu.
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Figure 4 Reactive power flow and injections results of scenario 2
a Reactive power flow from System to bus 2
b Reactive power injections from generator 2 and System
Figure 5 Reactive power support from generator 2 and
System
The results shown in Figs. 6 and 7 are consistent with
previous results emphasising the locality nature of
reactive power. Generator 2 now can neither transmit
its real power output without the help of other
reactive power sources in the system nor support the
system with any reactive power as the setpoint voltage
of generator 2 has to be higher than the maximum
limit of 1.1 pu in order to reach point ‘A’.
It should be emphasised that a generator could
depend on reactive power support of other sources to
transmit its own real power output even if the
generator is producing some reactive power as it can
be seen in the results. This happens when Q req of the
generator is larger than its actual reactive power
injection. This phenomenon is crucial in deregulated
energy markets even though it was not of interest in
vertically integrated utility environments. Unless this
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phenomenon is taken into consideration in reactive
power procurements and payments, some generators
actually subsidise others which could be seen as
imperfect competition.
4.2 IEEE-14 bus system
The market reactive power requirement concept
proposed in this paper is tested on a slightly modified
IEEE-14 bus system shown in Fig. 8 [15]. Since line
charging susceptance plays an important role in power
systems, two scenarios have been conducted in this
case study to show that the proposal takes into
consideration the effect of line charging.
4.2.1 Scenario 1: This scenario considers line charging
susceptance as a part of the network, that is system losses
equal the losses created on transmission lines
(Losses ¼ I 2  Zline) lines. The data and results
summary of this scenario are shown in Tables 1 and 2,
respectively.
It is found that Q req is consistent with intuitive
expectation. Both generators 1 and 2 receive reactive
power support from other reactive power sources
available in the system as both of them have contracted
loads (115 þ j 31.7) and (211 þ j 41.8) MVA,
respectively, and their allocated reactive power losses are
15.77 and 65.09 MVAr, respectively, whereas they are
producing 15.99 and 5.68 MVAr, respectively. Since the
synchronous condensers have no contracted reactive
power with loads, their outputs solely support the
network with its need of reactive power. Thus
synchronous condensers at buses 3, 6 and 8 are net
reactive power providers with 32.59 MVAr, 35.03 MVAr
and 20.74 MVAr, respectively as their outputs solely
serve the network needs of reactive power. Results also
show that transaction 2 relies more than transaction 1 on
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Figure 6 Reactive power flow and injections results of scenario 3

a Reactive power flow from bus 1 to bus 2
b Reactive power injections from generator 2 and System

Figure 7 Reactive power support from generator 2 and

System

reactive power help of others (generator 2 produces only
5.68 MVAr even though it trades larger amount of active
and reactive power) because transaction 2 has much
longer electrical distance to reach its destinations than
transaction 1 does. Therefore it requires more reactive
power help to ship its output. To further illustrate this
point, the simulation is repeated with all reactive power
being supplied only by generators 1 and 2 (assuming no
voltage violation occurs). The results in Table 3 show
that generator 2 now produces almost all its Q req as
both generators have similar relative locations in terms
of the electrical distance from the load center where all
contracted loads of transaction 2 are located.
4.2.2 Scenario 2: In this scenario, the line charging
susceptance is included in the allocations of
Figure 8 IEEE-14-bus system
participants, that is, every participant is allocated its
share of the losses of transmission lines taking
explicitly into consideration the effect of the reactive
power production of line charging susceptance.
Table 1 Data of IEEE-14-bus system case study
Generations Bus (contracted load in MVA)
1 2(21 þ j12.7), 3(94 þ j19)
2 4(47 2 j3.9), 5(10 þ j1.6), 6(15 þ j7.5),
9(30 þ j16.6), 10(9 þ j5.8), 11(15 þ j1.8),
12(35 þ j1.6), 13(30 þ j5.8), 14(20 þ j5)

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Table 2 Results of IEEE-14-bus system case study

Transacion Load value Base case Without synchronous Condensers

number
MW MVAr Qreq , Gen. output, Gen. support, Qreq , Gen. output, Gen. support,
MVAr MVAr MVAr MVAr MVAr MVAr
1 115 31.7 15.8 23.26 224.24 17.65 49.41 20.79
2 211 41.8 66.83 13.01 295.62 81.17 121.12 211.45

Table 3 Results of IEEE-14-bus system case study without synchronous condensers

Transacion Load value Qreq Generator output, Generator Support,

number mVAr MVAr MVAr
MW MVAr
1 115 31.7 17.65 49.41 20.79
2 211 41.8 81.17 121.12 211.45

Therefore it is expected that Q req of participants will be
smaller than the values in Scenario 1 as participants
benefit from the reactive power injection produced by
line charging susceptance. The reductions in Q req of
participants are different as their benefits differ due to
their relative locations within the network and system
conditions. The results are shown in Table 4. It is
shown that the Q req of transaction 1 has decreased
significantly compared to transaction 2. This is
because transaction 1 benefits from the line charging
more than transaction 2 due to its relative location
with respect to the charging susceptance. The total
reactive power produced by these lines is 13.11 MVAr
(15.86% of the losses on transmission lines and 9.17%
of the total MVAr outputs of generators and
synchronous condensers.).
The simulation is repeated without the synchronous
condensers (assuming no voltage violations occur) giving
the results shown in Table 5. Generator 1 produces
some excess reactive power more than its Q req which
helps transaction 2 ship its contracted loads. This is
expected as all the destinations of transaction 2 are in
the load center with electrical distance longer than that
between generator 1 and its demands. As a result,
generator 1 is considered a reactive power provider of
7.74 MVAr whereas generator 2 is reactive power
consumer of 7.74 MVAr.
5 Determination of (Qreq) in pool
markets: case studies
5.1 Simple two bus system for illustration
Consider the system in Fig. 9 where System voltage is fixed
at 1.0 pu. All System generators and System loads are
represented by G (System) and Load (System),
respectively. Four scenarios are conducted to illustrate
the proposed concept. Scenarios 1 and 2 assume that bus
2 is a load bus as shown in Fig. 9a while the load at bus
2 is replaced with a generator in Scenarios 3 and 4 in
Fig. 9b. It should be noticed that the transmission line
solely serves the load or the generator at bus 2.
5.1.1 Scenario 1: In this scenario, the load at bus 2
changes from 1 to 100 MW in 1 MW steps while
System load is fixed at 200 MW. The voltage of bus 2
has a lower limit of 0.9 pu. The impedance of the
transmission line is 0.015 þ j 0.2 pu. The simulation
results are shown in Fig. 10.

Table 4 Results of IEEE-14-bus system case study with explicit consideration of line charging susceptance

Transacion Load value Base case Without synchronous Condensers

number
MW MVAr Qreq , Gen. output, Gen. support, Qreq , Gen. output, Gen. support,
MVAr MVAr MVAr MVAr MVAr MVAr
1 115 31.7 6.48 23.26 214.93 9.97 49.41 7.74
2 211 41.8 63.03 13.01 291.82 87.06 121.12 27.74

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Table 5 Results of IEEE-14-bus system case study with explicit consideration of line charging susceptance while no reactive
power from synchronous condensers

Transacion number Load value Qreq , MVAr Generator output, Generator support,
MVAr MVAr
MW MVAr
1 115 31.7 9.97 49.41 7.74
2 211 41.8 87.06 121.12 27.74

Figure 9 One line diagrams of the two bus system for illustration (case study in Section 5.1)
a Scenarios 1 and 2
b Scenarios 3 and 4

Fig. 10b shows the results of applying (2) to calculate
reactive power support of each participant. These
results are consistent with expectation. The system
load is supplied by the system generator at the same
bus without system losses, that is, without any line
flow on the transmission line, whereas load 2 is
supplied by the system generator through the
transmission line. So, all the reactive power support
that comes from the system generator is utilised to
compensate the transmission losses caused by the
traded power transferred from System to load 2. Thus
the system generator and load 2 should be responsible
for this support cost. The total reactive power
support is fairly divided equally between the system
generator and the load at bus 2.
5.1.2 Scenario 2: Scenario 1 is repeated here with the
load at bus 2 is farther away. This is simulated by
increasing the line impedance to 0.015 þ j 0.3 pu.
As the results show in Fig. 11, the traded power
transferred from System to load 2 requires more reactive
power help than that of Scenario 1. This is because the
transmission reactive power loss is higher than that of
Scenario 1 as a result of increasing the transmission line
impedance. Again, the system load does not cause any
reactive power needs due to the same reason explained
in Scenario 1.
5.1.3 Scenario 3: This scenario simulates the system in
Fig. 9b with a setpoint voltage of 1.0 pu at bus 2. The
simulation results are shown in Fig. 12 where it can be

Figure 10 Reactive power flow and supports results of Scenario 1

a MVAr injection at bus 1
b MVAr supports

524 /IET Gener. Transm. Distrib., 2008, Vol. 2, No. 4, pp. 516 – 529 & The Institution of Engineering and Technology 2008
doi: 10.1049/iet-gtd:20070370

Figure 11 Reactive power flow and supports results of Scenario 2
a MVAr injection at bus 1
b MVAr supports
seen that the system generator always injects reactive
power, which increases as the traded power increases, to
compensate the transmission line reactive power losses
and maintain voltage profile. Since the transmission line
solely serves generator 2 by transferring its traded
power, all the loss allocation and its need of reactive
power help should be attributed to generator 2 and the
load it serves within the system. This can be seen from
the figure where generator 2 and system load obtain
reactive power support from system generator. The
required reactive power (Q req) for generator 2 and that
for the traded load are not equal. Even though this might
appear contradictory to expectation and fair allocation,
the results are correct. This is easily explained when
looking carefully to the simulation results of MVAr
output of the generator at bus 2 shown in Fig. 13.
Generator 2 absorbs (draws) some reactive power from
Figure 12 Reactive power flow and supports results of Scenario 3
a MVAr injection at bus 1
b MVAr supports
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www.ietdl.org
System for values of traded power less than 74 MW.
This means that the generator burdens the system
more than the load and receives some reactive power.
This is also clear when applying (2) in which the
injected reactive power of the generator is negative
resulting in larger reactive support received by the
generator. When the traded power is 74 MW, the
generator and the load receive the same reactive power
support as the generator now does not generate nor
absorb reactive power. This equal results are expected as
the reactive power support is dedicated to compensate
the loss on the transmission line which serves solely the
generator at bus 2 and the served load within the
system. When the generator at bus 2 starts to provide
some reactive power satisfying part of its Q req, the
remaining required reactive power is reduced compared
to that of the load.
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Figure 13 Reactive power outputs of system and the
generator at bus 2 of Scenario 3
5.1.4 Scenario 4: Scenario 3 is repeated when
generator 2 has a setpoint voltage that equals 1.06 pu.
The results shown in Fig. 14 are consistent with
previous results. Generator 2 now is able to support
the system with reactive power over the whole range
of traded power. Point A in Figs. 14a and 14b
deserves special attention. For the traded power
quantities less than that at point A, generator 2, by
injecting reactive power more than its Q req , provides
all the needed reactive power on the transmission line
as well as some extra reactive power to support
System. When the traded power of generator 2
reaches point A, System stops receiving reactive
power support from generator 2 and all the reactive
power needs of the transmission line is provided by
generator at bus 2, that is G (System) outputs zero
reactive power. For quantities of traded power higher
Figure 14 Reactive power flow and supports results of Scenario 4
a MVAr injection at bus 1
b MVAr supports
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doi: 10.1049/iet-gtd:20070370
than the value at point A, G (System) starts
participating in the transmission needs of reactive
power in which both generator 2 and G (System)
cooperate in providing the Q req of system load. So,
generator 2 and the system generator are considered
reactive power providers whereas system load is
considered a reactive power consumer.
It should be emphasised that a generator could
depend on other reactive power sources in the system
to ship its own real power output even if the
generator is producing some reactive power as it can
be seen from the simulation results. This happens
when Q req of a generator is larger than its actual
reactive power injection. Similarly, a load could be
considered a reactive power consumer even if it is a
pure unity power factor demand. On the other side,
the only portion of a generator’s reactive power
output that is greater than its Q req should be
considered as a system support. This phenomenon is
crucial in deregulated energy markets even though it
was not of interest in vertically integrated utility
environment. Unless this phenomenon is taken into
consideration in reactive power procurements and
payments, some generators would actually subsidise
other participants on the system which can be seen as
imperfect competition.
5.2 IEEE-14 bus system
The proposed concept of Q req is tested on the IEEE-14
bus system. The results summary is shown in
Tables 6 and 7.
It is found that Q req is consistent with intuitive
expectation in which traded power quantity and relative
locations within the network are reflected on the results.
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Table 6 Results of IEEE-14-bus system case study (loads)

Bus Load Qreq , Load support,

number MVAr MVAr
MW MVAr
1 0 0 0 0
2 21.7 12.7 0.0481 20.0481
3 94.2 19 15.5040 215.504
4 47.8 23.9 4.3964 24.3964
5 7.6 1.6 0.1191 20.1191
6 11.2 7.5 1.2073 21.2073
7 0 0 0 0
8 0 0 0 0
9 29.5 16.6 5.7663 25.7663
10 9 5.8 0.6261 20.6261
11 3.5 1.8 0.1048 20.1048
12 6.1 1.6 0.4468 20.4468
13 13.5 5.8 1.9751 21.9751
14 14.9 5 1.9313 21.9313

Loads close to generators have small Q req compared to
those far from generation sources. Load 2 has the
smallest Q req benefiting from the local generator at
bus~2 while load 3 has the highest one due to its large
demand which needs to travel from generator 1
and 2. The results show that all the outputs of the
synchronous generators are considered as reactive power
support delivered to the system which is expected since
their only function is to support the system with reactive
needs in order to compensate reactive losses and to
maintain voltages within limits. As stressed earlier,
generator 1 is considered a reactive power consumer,
that is, it draws some reactive power from the system,
even though it is generating some reactive power
whereas generator 2 provides some reactive power
support to the system. This is because the output of
generator 1 is less than its Q req whereas generator 2
produces reactive power more than its Q req . In this
situation, generator 2 is a reactive power provider while
generator 1 and all loads are considered reactive power
consumers.
Similar to bilateral markets, the line charging
susceptance can be easily included in Q req of each
participant resulting in different reductions for different
participants according to their relative locations. To avoid
unduly long paper, the simulation results here are omitted.
6 Generalisation
The proposed concept of Q req using CAF method is
generalised to be applied using any appropriate loss
allocation method. Q req is defined as the minimum
reactive power requirement, respecting all system
conditions, for a participant and it equals its allocated
reactive power loss using any appropriate loss

Table 7 Results of IEEE-14-bus system case study (generators and synchronous condensers)

Bus number Qreq , MVAr Generator output, MW Generator output, MVAr Generator support, MVAr
1 2.2736 105.87 1.8772 20.3964
2 5.8012 162.28 7.7206 1.9194
3 0 0 40 40
6 0 0 7.9616 7.9616
8 0 0 6.7756 6.7756

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allocation method. Then a participant reactive power
support, Q TSupport
i
, can be defined as follows
8 T
> Ti
< Q Inj
Q Alloc losses
i
Ti
Q Support ¼
>
Q Tcont
i
in bilateral markets
: Q Ti
Q Ti in pool markets
Inj Alloc losses
(3)
where Q TAlloc
i
losses is the allocated losses to participant Ti
using any appropriate loss allocation method.
So, instead of having fixed reactive power requirements
from participants in electricity markets, which is the
current practice, the new general concept assigns each
participant its own obligation of reactive power
participation based on its allocated reactive power loss
using any appropriate loss allocation method. Choosing
the loss allocation method is a policy issue that is
determined by the energy market regulator.
7 Conclusion
Reactive power has become increasingly a crucial issue in
deregulated energy markets. It has been recognised as
one of the important ancillary services that should be
procured competitively and fairly charged for. This paper
has two main contributions. First, it has proposed a new
method to determine the actual reactive power
providers and consumers. It is based on the proposed
concept of market reactive power requirement (Q req)
from each participant conducted on the network. Q req
of a participant equals its allocated reactive power loss
using CAF method proposed in part 1 of this two-part
set paper. Every participant is considered as a net
reactive power provider if it produces reactive power
more than its Q req while respecting SO instructions. On
the contrary, a participant that requires reactive power
help from other sources as its production of reactive
power is less than its Q req is considered as a reactive
power consumer. The proposed concept is applicable in
bilateral markets as well as pool markets. In bilateral
markets, every transaction as a whole, including load
and generator parties, is assigned its own Q req while in
pool markets, every participant, load or generator, is
assigned its own Q req . The second contribution is the
generalisation of the concept by which the reactive
power requirement for participants differ according to
their reactive power loss allocation using any appropriate
loss allocation method approved by the regulator. The
proposals have been tested extensively on many case
studies, but due to space limit, only selected results are
presented in this paper. The results show validity of the
introduced proposals. The proposed method and concept
help to have a fair and sound technical basis for reactive
power compensation in electricity markets. It sends
indicative signals for both contractors and system
528 /IET Gener. Transm. Distrib., 2008, Vol. 2, No. 4, pp. 516 – 529
doi: 10.1049/iet-gtd:20070370
operators about where reactive power is most needed. It
also drives participants to optimise their contracts taking
into consideration both real and reactive power. In
addition, it encourages new entrants of reactive power
providers to enter the market at the right locations.
However, since it is assumed in this paper that the
system is operating on heavy loaded conditions where
reactive power production is needed, another paper is
being prepared to extend the applicability of the
proposals to light loaded conditions in which ‘excess’
reactive power needs to be absorbed.
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& The Institution of Engineering and Technology 2008 IET Gener. Transm. Distrib., 2008, Vol. 2, No. 4, pp. 516– 529/ 529
doi: 10.1049/iet-gtd:20070370