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The reactive power pricing in deregulated environment

PHANISANKAR CHILUKURI AND NEHA NAGAR
I. I NTRODUCTION

Power transmission capability is limited by technological constraints. In order to maximize the amount of real power transfer, reactive power ows must be minimized. This means that more reactive power should be provided locally. In order to meet the bilateral contracts in a secure manner, Independent System Operator(ISO) should make provision for reactive power support. Local provision of reactive power makes it possible to reduce the I 2 X losses. ISO should ensure that reactive power and voltage both are maintained at acceptable levels under normal and emergency conditions for the sake of reliability and to prevent loss of loads. Voltages, that are too high or too low can result in increased power system losses, overheating of motors, and other equipments and system voltage collapse with consequent loss of customer loads. The goal should be to develop rules that ensure adequate supplies of reactive power are available in all locations. The reactive power service is one of the control area services(or ancillary services) that must be in place to make the provision of electric services possible. Costs for the transmission system facilities, are recovered through a transmission rate as a result of the monopoly of the transmission function. Most transmission utilities already include embedded costs booked for transmission in their basic transmission rate structure. This means that transmission customers are already being charged for the reactive power support based only on the costs of transmission equipment. In contrast, the costs incurred by the generation facilities to support the transmission service must be recovered from an ancillary service charge mechanism. Since the system operator will continue to depend upon generation suppliers to provide ancillary services, the operator will need to determine the requirements for reactive power and coordinate services to meet these requirements (gure 1). If we have a good pricing system for reactive power services, then it will send good price signals. This will help in better investments and asset utilization. The efciency and reliability of system operation will be improved. Voltage proles will be improved, which in turn, will reduce the incidents caused by high and low voltage problems. So, a price structure for providing the reactive power service is absolutely necessary.

Fig. 1.

Organization of the reactive energy market.

R EACTIVE POWER PROCUREMENT Procurement of any ancillary service can be done in two ways: (1) By providing a grid code, (2) Competitive basis. In the same way reactive power procurement is also done. The current mechanisms that are being used in contracting of reactive power services are : a. No payment. b. Tariff. c. Bilateral contracts. d. Tender market. e. Dynamic pricing(Open market). Mostly, the generators are mandated to provide reactive power within the power factor range of 0.9 lag and 0.95 lead. For reactive power generation/absorption beyond these limits the generators are nancially compensated for, including a payment if they are required to reduce their real power output. Different countries and different markets use one or more of the above stated mechanisms for procurement of reactive power. Unlike real power markets where bids are selected in ascending order of prices, reactive power markets need to incorporate the location aspects also. For example, a low priced reactive bid at a bus remotely located, is not an attractive option for the ISO. Such a reactive support may prove to be detrimental for the system while also increasing transmission losses. All reactive support providers are eligible for the availability payment component for their preparedness to provide when

time frame (seconds to minutes). Generators, Static VAr Compensators (SVCS), or other equipment capable of fast regulation can provide it. It helps in system dynamic security and voltage quality. Although the economic effect is undeniable, it is also difcult to evaluate. This type of service can be considered analogous to active power reserve (analogous to reactive power reserve) and frequency-control services (primary and secondary AGC frequency regulation) analogous to voltage control services. R EACTIVE POWER PRICING Reactive power needs to be provided locally, and hence, the worth of one MVAr of reactive power is not the same everywhere in the system. Thus, reactive power price should not be determined only based the cost (investment cost or opportunity cost) like a real power market. In a sense, reactive power value measures the relative importance of the var sources. They relate to the system conguration and operation conditions, location of each source etc, and have no direct relationship with the cost of the sources. A var source could have a high cost yet have a low value. In this case, it may not be protable for the source to offer reactive support service. Therefore, reactive power pricing methods need to take into account both offer prices and location of the resource in order to offer a correct price signal to providers and ensure secure operation of power system. Compared to dynamic var sources, reactive power output of the most of manual devices (shunt capacitor and reactor) is not continuously controllable and drops with the voltage squared. The static var sources are thus really appropriate for setting static voltage proles and do not respond the instantaneous change of reactive power requirements. Consequently, the two kinds of resources will be treated differently in reactive power pricing. When generators are operating in leading phase condition, the temperature at the armature terminal rise, ageing of armature insulation quicken and the life of generators shorten. Moreover, leading phase operation will give rise to diminish the static stability margin, increase outage probability and bring vast reliability charge. Consequently, generators which are operating in leading phase should be paid more nancial compensations. And steps must be taken such that no reactive power source acquires market power. As the real power output is decreased, the generator receives lesser revenue from the sell of energy although by way of this reduced generation, it saves some generating cost. The reduced income for the generator has to be compensated. T HE I NDIAN S CENARIO OF PROCUREMENT AND PRICING India employs both grid code and competitive procurement and pricing. The competitive basis for India scenario will be explained in the world wide scenario pricing techniques below in the next section. For competitive basis India uses a hybrid of postage stamp method(75 percent) and a hybrid(25 percent) of marginal participation and power ow tracing after the OPF is run and we get the reactive power injections. (Elaborate

Fig. 2. The mandatory (no payment) reactive power requirement and the ancillary service component that receives nancial compensation.

called for. Synchronous condensers also receive enabling payment component paid for their service when their is activated by ISO. The compensation payment option mentioned above is based on opportunity cost and is paid when it has been constrained from operating according to the market decisions. For example if a generator has to provide reactive power where it has to reduce its real power generation in order to operate within the eld and armature winding heating limits, the generator will be compensated for its lost power generation. R EACTIVE SUPPORT AND VOLTAGE CONTROL SERVICES Before going to reactive power pricing, rst we have to understand the concept of Reactive power management and voltage control services in transmission system and this can be decomposed in two parts: (I) Voltage prole management and reactive dispatch: This service is based on the optimization of the cost of system active power losses while keeping steady-state system security in the face of possible contingencies (for instance, by keeping the voltage prole and the reactive power reserves within margins). Reactive power demand changes on an hourly basis or slower. Generators, capacitors, reactances and distribution load management provide this service. The role of the system operator is to perform the reactive power dispatch by taking into account the reactive control elements that belong to different agents: generation, transmission and distribution utilities, as well as the cost of using them. The procedure for solving the optimal dispatch must be transparent among the agents and technically sound. Optimal Power Flow (OPF) methods have been used for this purpose. This type of services has a similarity with the active power economic dispatch related to the implementation of the hourly pool-based energy market. (II) Voltage control: It is also known as voltage regulation is done by automatic voltage regulator (AVR) at the generator side. It is the service provided to keep the network voltages in a dynamic

mode) Grid code: 1. Reactive power compensation should ideally be provided locally, by generating reactive power as close to the reactive power consumption as possible. The Regional Entities except Generating Stations are therefore expected to provide local VAr compensation/generation such that they do not draw VArs from the EHV grid, particularly under low-voltage condition. To discourage VAr drawls by Regional Entities except Generating Stations, VAr exchanges with Inter State Transmission System(ISTS) shall be priced as follows: - The Regional Entity except Generating Stations pays for VAr drawl when voltage at the metering point is below 0.97pu. - The Regional Entity except Generating Stations gets paid for VAr return when voltage is below .97 pu. - The Regional Entity except Generating Stations gets paid for VAr drawal when voltage is above 1.03pu. The Regional Entity except Generating Stations pays for VAr return when voltage is above 1.03pu. Provided that there shall be no charge/payment for VAr drawal/return by a Regional Entity except Generating Stations on its own line emanating directly from an ISGS. 2. The charge for VArh shall be at the rate of 10 paise/kVArh w.e.f. 1.4.2010, and this will be applicable between the Regional Entity, except Generating Stations, and the regional pool account for VAr interchanges. This rate shall be escalated at 0.5 paise/kVArh per year thereafter, unless otherwise revised by the Commission. 3. Notwithstanding the above, RLDC(Regional Load dispatch center) may direct a Regional Entity except Generating Stations to curtail its VAr drawal/injection in case the security of grid or safety of any equipment is endangered. 4. In general, the Regional Entities except Generating Stations shall endeavour to minimize the VAr drawl at an interchange point when the voltage at that point is below 0.95pu of rated, and shall not return VAr when the voltage is above 1.05pu. ICT(Iron Core Transformer) taps at the respective drawl points may be changed to control the VAr interchange as per a Regional Entity except Generating stations request to the RLDC, but only at reasonable intervals. 5. Switching in/out of all 400 kV bus and line Reactors throughout the grid shall be carried out as per instructions of RLDC. Tap changing on all 400/220 kV ICTs shall also be done as per RLDCs instructions only. 6. The ISGS(Inter State Generation System) and other generating stations connected to regional grid shall generate/absorb reactive power as per instructions of RLDC, within capability limits of the respective generating units, that is without sacricing on the active generation required at that time. No payments shall be made to the generating companies for such VAr generation/absorption.

7. VAr exchange directly between two Regional Entities except Generating Stations on the interconnecting lines owned by them (singly or jointly) generally address or cause a local voltage problem, and generally do not have an impact on the voltage prole of the regional grid.

R EST OF THE WORLD SCENARIO OF REACTIVE POWER

PROCUREMENT AND PRICING

Pricing techniques : A. Foundation and Characteristics of Spot Pricing: The spot pricing theory was established by Scheweppe et al based on the principle that marginal cost equals price in a perfectly competitive market in the late 80s. Marginal cost, C=price, p. Spot pricing, the actual marginal cost, can provide a correct economic signal, reect the supply-demand balance, guide generators and consumers on their behaviors in the market, improve production efciency and yield maximum social benet. However, the spot pricing approach has many disadvantages such as it is usually obtained from time-consuming optimal power ow (OPF) computation, the price uctuation is signicant and marginal price cannot recover actual cost etc. Therefore, the real-time applications are difcult. B. Real-time Pricing of Reactive Power: The conventional spot pricing theory adopts economic dispatch and DC power ow model without considering reactive power and other ancillary services. Further researches extended the spot pricing theory to reactive power domain at rst and examined the real-time pricing of reactive power using a modication of the OPF model. They indicate that the marginal prices of real and reactive power on bus i are Lagrange multiplier lambda piand lambda qi,respectively, so OPF is an important measure to calculate the spot pricing. Reactive power dispatch is examined using an OPF formulation to minimize reactive power cost. They use an OPF based dispatch/pricing model that optimally allocates real and dynamic reactive reserve among the generators to meet a prespecied voltage stability margin. The modeling framework will trade MW and MVAr reserve together with energy in an electricity spot market, rather than treating reserve as part of ancillary services. C. Power Flow Tracing: There are several methods for reactive power pricing or cost allocation besides spot pricing such as stamp method, MW-Mile method and power ow tracing. With advantages and disadvantages, power ower tracing is the best of all in rationality and veracity. Based on the AC load ow solution, the inject and outow power at each bus can be obtained, in turn reactive power production cost of each source and reactive power transmission cost of each line should be allocated to system load, respectively. The method is simple but it doesnt touch the procurement mechanisms of reactive power.

P ROCUREMENT AND PRICING IN OTHER COUNTRIES Procurement and pricing in some countries are: a. California ISO: California ISO has instituted the competitive ancillary services market besides energy market. But reactive power service cannot be included in it. The ISO procures reactive power support service on long-term contracts from reliable must-run generating units. The generators are mandated to provide reactive power within the power factor range of 0.90 lag and 0.95 lead. For reactive power generation / absorption beyond these limits, the generators are nancially compensated for, including a payment if they are required to reduce their real power output. B. The United Kingdom Reactive power service is provided on a mandatory and commercial basis. Currently a dual mechanism exists: default tariff ( similar to India in case of grid code) arrangement and tender market . invites tenders from generators who wish to participate in the new open reactive power market. The successful participants get annual bilateral contracts and are paid for both capability and utilization of reactive power based on their bids. The generators, who do not participate in the market and are nevertheless required to provide reactive power, will receive a default payment C. Australia The Australian electricity market and its ISO, the National Electricity Market Management Company (NEMCO) recognizes only that reactive power provided by synchronous generators and synchronous condensers, as ancillary services and nancial compensation is made available to them for their service provisions D. Nordic Electricity Market Nordic Electricity Market is composed of Norway, Sweden, Finland, Denmark. Nordic countries do not have any provision for payment towards reactive power services. Reactive power service is provided on a mandatory basis. E. PJM Interconnection The Pennsylvania - New Jersey - Maryland (PJM) interconnection restructured its operations in 1997. Two distinct components were segregated. The rst component was the reactive capability at rated capacity of a generator while the second was the reactive capability at reduced generator output levels. It has been mandated that reactive power supply and voltage control services will be provided directly by the individual transmission providers. The transmission providers in turn have dened the tariff rates for their customers. R EACTIVE POWER PRICING METHODS There are different methods of determining reactive power price. Appropriate and accurate pricing of this service not only covers the costs of reactive power supplying and provides incentives for investment of reactive power equipment so

as to maximize overall social welfare, but also gives useful information about necessity of reactive power supporting and voltage control to system operator. Two methods of pricing reactive power are discussed in [2] and [3]. A brief introduction to these two methods is as follows: 1.Sequential Linear Programming with Considered Investment Cost of Capacitor Banks [3] : This method is based on the marginal cost theory is presented for calculation of the pricing of active and reactive power at each bus in competitive electric markets. Production cost of reactive power and investment cost of capacitor banks are included in the objective function of the optimal power ow problem. Sequential linear programming method is used to solve the optimal problem. This method is based on a Marginal Cost Theory to obtain the price of active and reactive power at each bus. Objective function is the minimization of the cost of the active power and reactive power subjected to set of equations(equality constraints), determined by Kirchoffs laws, that characterize the ow of power throughout the system and inequality constraints (min and max limits of generation and voltages). The proposed method has been tested on the 9-bus system using MATLAB [3]. 2. Pricing of Reactive Power Service in Deregulated Electricity Markets Based on Particle Swarm Optimization [2] : This is a new evolutionary method for reactive power pricing based on optimal power ow. This optimization method is for determining active and reactive power prices produced by generators, based on Locational Marginal Price (LMP). Particle swarm optimization is a population based optimization method which was proposed by Kennedy and Eberhart in 1995. Objective function used in this case consists of active and reactive power production cost produced by generators. This objective function is minimizing nction. In this example a network having N number of buses and Ng number of generator buses is considered. The ow chart for calculating reactive power price is shown in gure 3. Locational marginal price (LMP) at each bus for calculating Active and Reactive power price. C OST COMPONENTS OF REACTIVE POWER In many restructured market, ISO may not be able to determine a generators revenue loss due to not having access to information on generators. So, an appropriate option in such markets is to call for reactive bids from generators. Reactive bids from generators will be the cost of reactive power and this cost consists of many components. The cost components for reactive power can be identied from the capability curve are as follows: (a) Fixed cost component: It is the capital cost component of reactive power which represents the capacity of generator used to supply reactive power. This may be calculated as: T C tan(cos1 p.f.) Fixed cost (F Cq ) = IC AF LF 8760 M

when it supplies reactive power. For minimum to maximum values of reactive power, MW or active power loss is computed from loss curve. This loss is small and approximately 3 to 4 percent of the reactive power supplied. This active power loss corresponding to different values of reactive power is multiplied by incremental cost or variable cost of active power (INR/MWh) to get different values of loss components.

Fig. 5.

Generators expectation of nancial compensation.

Fig. 3.

The ow chart of active and reactive power pricing using PSO.

INR/MVAr/hr TC=Total installation cost IC= Installation capacity AF= Availability factor LF= Load factor of generating station M= Expected life of power plant in years

Fig. 4.

Synchronous generator capability curve.

(b) Variable cost or cost of loss component: It is the cost towards MW loss taking place in the generator

(c) Opportunity cost component: Opportunity cost component is the major cost component in reactive power pricing for generator. This is a variable cost component. When a generator operates on the limiting part of the loading capability curve and if additional reactive power is extracted, its active power generation has to be reduced to adhere to the capability limits.In gure 2 When reactive power has to increase from Qbase to QB active power decreases from PA to PB. The loss of revenue occurred due to decrease in generation of active power contributes to the opportunity cost component. Opportunity cost component can be calculated as: Opportunity cost component = m(PA PB ) [C(PA ) C(PB )] (INR/hr) Where, m = Price of active power (INR/MWh) PA , PB = Active power generation by the generator corresponding to points A and B on the loading capability curve (MW/hr) in gure 4. C(CA ), C(PB ) = Cost functions of active powersPA andPB corresponding to points A and B on the loading capability curve (INR/hr). Real power cost is a quadratic function of PG . Loading capability curve (gure 4) may be considered in three regions: Region 1: 0 to Qb ase, No payment in this region. Reactive power output in this range is used by the generator to meet its own requirements such as in boiler feed pump motors, circulating water system pump motors, ID fan and FD fan motors, step-up transformers, etc. Region 2: Qbase to QA , the generator expects a payment for making available its service. This payment is made at a constant rate on a per MVAr basis. Region 3: QA toQB , this region denotes that for supplying reactive power, generator has to reduce its active power. The payment that the generator expects from the ISO for this reactive support service will be proportional to the amount of reactive support it provides and at a rate determined by its revenue losses (gure 5). Fixed cost component and loss component are very small as compared to opportunity cost component.But, for very small

R EFERENCES
[1] S. Hao and A. Papalexopoulos, Reactive power pricing and management, IEEE Transactions on Power Systems, vol. 12, February 1997. [2] M. Sedighizadeh, A. Rezazadeh, and M. S. Yazdi, Pricing of reactive power service in deregulated electricity markets based on particle swarm optimization, International Journal of Computer and Electrical Engineering, vol. 2, December 2010. [3] S. Seifossadat, M. Saniei, and A. Raeszadeh, Reactive power pricing in competitive electric markets using a sequential linear programming with considered investment cost of capacitor banks, International Journal of Innovations in Energy Systems and Power, vol. 4, April 2009. [4] K. Bhattacharya and J. Zhong, Reactive power as an ancillary service, IEEE TRANSACTIONS ON POWER SYSTEMS, vol. 16, May 2001. [5] G. A.Vaidya, N. Gopalakrishnan, and Y. P. Nerkar, Cost based reactive power pricing structure in restructured environment, IEEE TRANSACTIONS ON POWER SYSTEMS, 2008. [6] G. A.Vaidya, N. Gopalakrishnan, and Y. P. Nerkar, Cost based reactive power pricing structure in restructured environment, 2002. [7] M. Caramanis, R. Bohn, and F. Schweppe, Optimal spot pricing: Practice and theory, September 1982.

Fig. 6.

Relationship between reactive power and various cost components.

values of reactive power, loss component is higher than xed cost component and opportunity cost component as shown in gure 6. C OCNCLUSION Although reactive power pricing problems have been discussed and debated in the literature. The problem includes the procurement of reactive power and the reactive power pricing schemes in India and other countries. And the various cost components associated with generator reactive power is explained by capability curve of generator. The role of ISO as an intermediate between the reactive power supplier and consumers is discussed here.