Efficient and Reliable Reactive Power Supply and Consumption - Insights from an Integrated Program of Engineering and Economics Research

In 2005, the Federal Energy Regulatory Commission (FERC) began discussing regulatory policy for reactive-power procurement and pricing in competitive electricity markets. This paper summarizes findings from a unique, interdisciplinary program of public-interest research that lays a formal foundation for evaluating aspects of FERC staff recommendations and offers early insights that should be useful in guiding policy implementation, specifically by:

• clarifying the consumers and economic characteristics of reactive power as a basis for creating incentives to appropriately price it,
• defining specific challenges in creating a competitive market for reactive power as well as new tools needed to help ensure such a market functions efficiently, and
• demonstrating the importance of accounting for the physical characteristics of the transmission network in planning for reactive power and avoiding the exercise of market power by suppliers.