IEEE Transactions on Power Systems, Vo1.6, No.

1, February 1991

23

REAL-TIME PRICING OF REACTIVE POWER: THEORY AND CASE STUDY RESULTS

by
Martin L. Baughman
Shams N.Siddiqi
Senior Member
Student Member
Professor
Graduate Research Assistant
Department of Electrical and Computer Engineering
The University of Texas at Austin
Austin, Texas 78712

ABSTRACT
An analysis is made of real-time pricing policies of reactive
power using a modification of the OPF model. The theory of realtime pricing of reactive power is presented, followed by a case study
illustrating the magnitudes and ranges that real-time prices of
reactive power might take on under different circumstances. The
efficiency implications of real-time pricing of reactive power are
compared with traditional power factor penalties. It is concluded
that real-time pricing of reactive power should develop
simultaneously with that of active power for maximum economic
efficiency and smooth operation of the electricity marketplace.

KEY WORDS ; Reactive Power, Real-Time Pricing, Optimal Power

Flow

I INTRODUCTION
Real-time pricing of electrical energy is an area of intense
research at present. Real-time pricing of reactive power is closely
related to that of active (orreal) power.
The development of spot pricing theory and the analysis of
the practice of spot pricing for real power have been carried out by
Caramanis, Bohn and Schweppe [1],[2], among others. Schweppe,
et. al. [3] see spot pricing becoming more attractive in a competitive
electricity market, especially at the generation stage where
independent power producers would adjust their generation levels
according to the spot prices paid to the producers for their power
production.
An extensive discussion on the implementation and
functioning of a spot price based energy marketplace is made in [4].
It includes topics ranging from spot price based rates and revenue
reconciliation to optimal investment conditions. a summary of
existing rates that are related to real-time prices and load
management schemes that reflect real-time pricing policies is
provided in [5]. A utility perspective on spot pricing is given in [6].
Most discussions on spot pricing of real power are equally relevant
to real-time pricing of reactive power.
Unfortunately, the pricing of reactive power has received
very little attention. A reason for this negligence is the inherent
difficulty in understanding the concept, especially by economists.
Berg, et. al. [7] point out the inconsistency and inadequacy of the
present pricing policies based on power factor penalties. They
suggest that, given the present high cost of additional investments
by electric utilities, prices should be derived from economic
principles, which support a pricing approach that has price equal
marginal costs, that would also reflect today's technological
constraints.
As power system margins are reduced because of emphasis
on the greater use of generation and transmission, power systems
dispatchersmust operate their systems much closer to their technical
limits. Real-time prices for reactive power provide information to
both users and dispatchers of electricity about the cost and value of
reactive power usage, flows, and sources.
90 SM 466-3 PWRS
A paper recommended and approved
by t h e IEEE Power System Engineering Committee of the
IEEE Power Engineering Society for presentation a t the
IEEE/PES 1990 Summer Meeting, Minneapolis, Minnesota,
J u l y 15-19, 1990. Manuscript submitted February 1,
1990; made available f o r p r i n t i n g April 24, 1990.

Ray and Alvarado [8] use a modification of the Optimal

Power Flow (OPF) model which allows for the price
responsiveness of real power demand to analyze the effects of spot
pricing policies. A similar model, but one which also allows for the
price responsiveness of reactive power demand, will be used here to
reactive power.
analyze the impact of real-time pricing of real
In this paper, an analysis is made of real-time pricing of
reactive power using a modification of the OPF model. In the next
section the theory of real-time pricing of reactive power is presented.
In Section 111, a case study illustrating the magnitudes and ranges
that real-time prices of reactive power might take on under different
circumstances is presented. The next section then discusses the
efficiency implications of real-time pricing of reactive power when
compared with traditional power factor penalties. The last section
concludes that real-time pricing of reactive power should develop
simultaneously with that of active power for maximum economic
efficiency and smooth operation of the electricity marketplace.

II. THEORY OF REAL-TIME PRICING OF REAC'I?VE POWER

A theory of real-time pricing of reactive power that
accurately reflects the underlying physical and engineering
properties of electricity is presented below.
ill be used in the derivation:
The following notation w
C = total system operating cost
Ci(.)= cost function of generating plant at Bus i
Pgi = active power generation at Bus i
Qgi = reactive power generation at Bus i
Pdi = active power demand at Bus i
Qdi = reactive power demand at Bus i
Vi = voltage at Bus i
6i = voltage angle at Bus i
YBUS=[Yij] = admittance matrix of the transmission network.
8ij = phase angle of Yij
Pi, = active power flow from Bus i to Bus j
N = set of all buses in the system
G = set of all buses having generating capacity
MCpi= Lagrange multiplier on the active power equation at Bus i
M Q = Lagrange multiplier on the reactive power equation at Bus i
& , i n = Lagrange multiplier on the minimum active power
generation limit at Bus i
hi,m= = Lagrange multiplier on the maximum active power
generation limit at Bus i
pi,min= Lagrange multiplier on the minimum reactive power
generation at Bus i
pi,"=Lagrange
multiplier on the maximum reactive power
generation at Bus i
qi, = Lagrange multiplier on the active power flow limit from Bus i
to Bus j
Vimh= Lagrange multiplier on the minimum voltage level at Bus i
Vim== Lagrange multiplier on the maximumvoltage level at Bus i
Epi = price elasticity of demand of active power at Bus i
Q = price elasticity of demand of reactive power at Bus i
Epqi = cross-price elasticity of demand for active power with
respect to a change in price of reactive power at Bus i
Espi = cross-price elasticity of demand for reactive power with
respect to a change in price of active power at Bus i
Dpi = demand for active power at Bus i for active power and
reactive power prices equal to unity
Dqj = demand for reactive power at Bus i for active power
and reactive power prices equal to unity.

0885-8950/91/0200-0023$01.000 1991 EEE

24

It is assumed that a single welfare-maximizingpublic utility

owns and operates the generating plants and transmission network
of the electric power system under consideration and it sells active
and reactive power to independent customers. The utility is assumed
to be able to set and communicate prices instantly, and can set a
different price for each customer location at each moment. The
customer responses to these prices are assumed to be known and are
given by the demand functions. It is also assumed that demands are
independent of past and future prices and, correspondingly, for
generating costs. Therefore, the model can be solved as a single
period model.
Objective:
The objective of the pricing policy is to maximize social
welfare, that is, to maximize consumers' plus producers' surplus,
subject to the operational constraints. This is accomplished by
setting prices of real and reactive power at each bus at a particular
time equal to the marginal costs of supplying real and reactive
power, respectively, at that bus and that time, where the marginal
costs are determined on the basis of an optimal load dispatch, that is,
real and reactive power dispatch so as to minimize total operating
costs of the utility, subject to the operational constraints.The pattern
of optimal load dispatch is dependent on the real and reactive power
demands, and, on the other hand, real and reactive power demands
are dependent on the prices, that is, marginal costs determined from
the optimal load dispatch. Thus, this is a bi-level problem consisting
of an upper and a lower part. The upper level problem is that of
satisfying the demand functions, where the prices are implicitly
determined by the lower level problem, which is that of minimizing
total operating costs subject to the operational constraints.
Demand Functions:
The demand functions are assumed to be of log-linear form
exhibiting constant price elasticity and cross-price elasticity.The
demand functions may be mathematically expressed in the following
equation forms:
Pd;= Dpi ( MCp;)Epi( MCqi)Ep9'

(1)

wi= %i (MQi)E4ph(MCqi)'1
(2)
which give the demand of real and reactive power at Bus i as a
function of prices of real and reactive power at that bus, for all i E N.
The parameters of the equations, which are Dpi, Dqi, Epi,
Eqi,. Epqi, and Ewi, vary with customer classes, time under
consideration, and other exogenous factors. For example, they may
differ for residential and commercial customers, the time of day, the
season, weather conditions, etc.
The prices of real and reactive power, which are equal to
marginal costs MCpi and MCqi, respectively, when load is
dispatched optimally, are implicitly defined by the following lower
level problem.

Lower-levelObjective Function:
The lower level problem is basically the optimal power flow
problem which has the objective of minimizing the total cost of
operating the spatially separated generating units subject to the set of
equations that characterize the flow of power throughout the system
and all operational constraints. Since the operating cost of producing
reactive power is much less than that of real power where the
capacity exists, the operating cost of generating reactive power is
assumed to be negligible compared to that of real power in the
analysis to follow. Thus, the objective function may be expressed in
the following form:
Minimize C =
Ci ( Pgi)
(3)
ieG

where Ci ( Pgi ) is the operating cost of producing Pgi units of real

power at the generatingplant at Bus i.
There are several constraints to the lower level problem.

Qg;

j E N

IVi I IV, lYij Sin( Bij+6,-6i ) = 0

(5)

jeN

which are the active and eaci ve power flow equations,

respectively, for all i E N.
The Lagrange multipliers of the above constraints, M Q i and
MCqi respectively, give the marginal costs of supplying real and
reactive power at Bus i and thus determine the prices of real and
reactive power, respectively, at that bus.
Generation Limits:
The generating plants of the utility have a maximum
generating capacity, above which it is not feasible to generate due to
technical or economic reasons. Generation limits are important in
determining the operating points and marginal costs of generation.
Generating limits are usually expressed as maximum and minimum
active power and reactive power outputs,
Pgi,min I Pgi I Pgi,max
(6)
Qgi,max 5 Qgi I Qgi,max
(7)
where Pgi,min and Pgi,max are the minimum and maximum active
power output and Qgi,min and Qgi,max are the minimum and
maximum reactive power output, respectively, of the generating
plant at Bus i, for all i E G.
If the plant at Bus i has only reactive power generating
capability, for example, capacitor banks or synchronous
condensers, then Pgi min = 0, Pgi,max = 0, Qgi,min = 0,and the set
of constraints effectivkly reduce to
0 2 Qgi I Qgi,max .
(8)
Transmission Limits:
Transmission limits refer to the maximum power or current
that a given transmission line is capable of transmitting under given
conditions. These limits can be based on thermal considerations or
on stability considerations. Thermal limits usually dominate for
shorter lines. Dynamic stability limits dominate longer line behavior.
These limits affect the marginal costs of operation. Transmission
limits are expressed here in terms of the maximum active power
flow through the lines,
(9)
Pij,min 5 Pij 5 Pij,max
where Pij = IVi I IVj I IYi, I COS(8ij+6,-6i ) - IVi l2 IYij I Coseij,
assuming that shunt admittance is negligible, where Pij,min and
Pij,max are the minimum and maximum active power flow,
respectlvely, through the line connecting Bus i to Bus j ,for i # j,
and all i, j E N .
Voltage Limits:
Voltage limits refer to the requirement for the system bus
voltages to remain within a narrow range of levels. Since voltages
are affected primarily by reactive power flows, the marginal cost of
supplying reactive power to a bus is directly dependent in the
voltage level requirement at that bus. The voltage limits can be
expressed by the following constraints,
(10)
Vi,min I IViI I V i D a
where Vi,min and Vi,"
are the minimum and maximum voltage
levels, respectively, that are acceptable at Bus i, for all i E N.
Model Solution:
A method of solution for the bi-level nonlinear programming
problem is presented below.
The Lagrangian to be minimized over all active power
generation levels Pg, reactive power generation levels Qg, voltage
levels V, and voltage angles 6, is:
L ( Pg, Qg, V, 6 ) =

Ci(Pgi)

i E G

Load Flow Equations:

The set of equations, determined by Kirchoffs laws, that
characterize the flow of power throughout the system are given
below:
Pgi - Pdi IVi I IVj I 1YijI COS(8iJ+6j-6i ) = 0
(4)

- Qdi +

[ operating costs I
( M Q i ) [Pgi - Pdi N~INjITY~~ICos(8i$6J-6i)]

iE

'

jeN

[ active power flow equations ]

25

I V I~wj I

ai- wi +

( M C ~i ~
i EN

wijI Sin( eij+6j--6i I

jEN

[ reactive power flow equations ]

ieG
+

C
iEG

hi,min(pgi-Pgi,min)
[ min. active power generation limit ]
hi,max ( Pgi- Pgi,max)
[ max. active power generation limit ]

Fi,min ( Qgi - Qi,min)

iEG
+

C
iEG

[min. reactive power generation limit ]

( Qi - Qi,max)

Wi,max

[max.reactive power generation limit]

c 'f

qij ( lpijl- Pij,max)

iEN JEN

Itransmission line constraints 1

Vi,min (

I - Vi,min)

iEN
+

[ minimum voltage levels ]

Vi,max (

I - Vi,max)

iEN

[ maximum voltage levels ]

(11)
with the additional condition that the demand functions must be
satisfied, that is,
Pdi= Dpi ( M C P ~ ) ~ "MCqi)ER'
(
(12)

(13)
Qdi= mi (MCPi)Egp'(MCqi)'g'
for all i E N.
The Kuhn-Tucker conditions for the minimization problem
along with the demand functions can be solved simultaneously to
obtain the real-time prices of active and reactive power at each bus
that maximizes overall social welfare along with the generation,
demand, voltage magnitude and angle at each bus and the power
flow in each line.
Definition of Real-time Prices:
The real-time price of real power based on marginal cost at
Bus i and at a particular time is given by,

pi = - [ total cost of providing electricity to all customers subject

6Pd
to the operational constraints ]
- -6L

6Pd
= MCpi

Similarly, the real-time price of reactive power based on

marginal cost at Bus i and at a particular time is given by:
6
q, = - [ total cost of providing electricity to all customers subject
SQdi
to the operational constraints ]
6L
--

6Qdi
= MCqi
111. CASE STUDY

A simple, four-bus test power system, shown in Fig.1, is

used to gain insights into the effects of real-time pricing.The buses
are interconnected by high voltage transmission lines. At buses 1
and 2, there are utility-controlled generating plants. The two
generating units each have a unique operating cost function derived
from data on fuel costs of the generating units. A controllable
reactive power source is available at Bus 3. Customer loads exist at
every bus and each load is assumed to be price sensitive and
expressible by demand functions for active power and reactive
power that have constant price elasticity and cross-price elasticity.
The units of all quantities are given in per unit on a basis of 100
MVA and 138 kV. Voltage angles are in radians.

Generating Unit

- e m

Figure 1 The Four-bus Test Power System

Model Formulation:
The modified OPF model used to solve the bi-level problem
can be formulated as the optimization problem of minimizing the
total cost of operating the spatially separated generating units subject
to the load flow equations that characterize the flow of real and
reactive power throughout the system, the operational constraints
such as generation limits, transmission limits and voltage limits, and
the demand functions for real and reactive power at every bus.
The formulation of the model is described below.
ObjectiveFunction:
Minimize C = C1( Pgl ) + C2 ( Pg2 )
= 33251+1622 Pg1+169.5 Pg12+ 2098.9 Pg2+ 441.9 Pg22
Load Flow Equations:
4

Pgi - Pdi - ~ N i I N j I N i , i C ~ ~ ( 8 i j + 6 j =
- 6 0i )
j=l

ai- ai+ C N , I N ~ I N ~ ~ I =S o~ ~ ( ~ ~ , + ~ , - ~
j=1

for i = 1,2,3,4.
Generation Limits:
0.0 I Pgl I 6.3
0.0 5 Pg2 I 2.0
-1.0 I Qgl I 3.5
-0.8 I Qg2 S 3.0
-0.05 I Qg3 2 0.2
Transmission Limits:
Pij I 1.8
for all i = 1,2,3,4, j = 1,2,3,4 and i # j.
Voltage Limits:
I v1 I = 1.0
I v2 I = 1.0
0.95 I I V3 I I 1.05
0.95 I I V41 2 1.05
Demand Functions:
Pd, = Dpl ( MCpl)-0'2(MCql)o'a
Y

~
Pd2 = Dp2 ( M Q J ~ ) - ("MCq2)O.O
-0.0001

Pd3 = D P 3 ( MCP3
MCq3 1
Pd4 = Dp4 ( MCp4)-'.05 ( MCq4 )-0'04

Qd,

Qd2 =

Dql ( MCpl )-o.2(MCql

D q 2 ( MCp2

( MCq2 )O"

Qd3 = Dq3 ( MCp3 ) - 0 ' 0 5 ( MCq3

Qd4 = Dq4 ( MCp4 )-0.02 ( MCq4 )-O'l
where Dpi and Dqi vary with time of use and are determined
from load curves. The values at the time of system peak are:
Dpl = 5.677
Dql = 2.962
Dq2 = 0.667
Dp2 = 1.444
Dp3 = 1.889
Dq3 = 0.8175
Dp4 = 1.184
Dq4 = 0.6434

26

Results:
The model formulated in the previous section was solved on
the CDC Dual Cyber 170/750 using GRG2 [9], a program which
solves nonlinear programming problems using generalized reduced
gradient methods. The results obtained from the analysis are
presented below.

Flat-rates

Behavior of Real-time Prices:

The variations of real-time prices of active and reactive
power at Bus 3 for a 24 hour period are shown in Figs. 2 and 3 for
customer demands under flat-rate pricing as well as customer
demands which are price responsive under real-time pricing. Realtime price trajectories are closely related to demand, except that the
percentage change in prices is greater than the corresponding
percentage change in demand.
Effect of Operational Constraints:
The effect of operational constraints on the utility and its
customers under real-time pricing is studied by observing the impact
of varying a single constraint while keeping the rest of the
constraints fixed. The observed effects at the time of system peak
are described below.
(a) Generation limits:
In general, the most economically efficient generating units
are used to supply the base load, generating units of lesser efficiency
to supply the intermediate load, and the most inefficient units to meet
peak load. Thus, with the increase of load,as more inefficient units
are operated to supply the demand, the marginal cost and hence the
real-time price of real power increases due to the introduction of
inefficient units as well as due to the increase in losses. Taking the
partial derivative of equation (1 1) with respect to Pgi and Qgi, we
get,
= L [ C i (Pgi)] - MCp;- hi,m;l+ hisnax
(14)
spgi
spgi
= - MCg -

pi,-

+ pisnax

(15)

6Qgi
Since the function L is minimized with respect to Pgi and

12

18

24

Hours

Fig.3 Variations of Real-time Price of Reactive Power at Bus 3 for

a 24 Hour Period
Thus, at a generating bus, the price of active power is equal
to the marginal cost of production and the price of reactive power is
zem until the generatingcapacity limits are reached. Figures 4 and 5
show the effects of decreasing the generating capacity of the
generating unit at Bus 1 under real-time pricing of active and reactive
power.

ii

w,

"1

Bus1
Bus2

(18)
0

MCqi = - Pi,min + Pi,max

36

(19)

50

100
150
Power Generationat Bus 1

200

Fig.4 Real-time Price of Active Power vs.Power Generation at Bus1

Flat-rates

+ Real-time rates

Bus3

+ Bus4

50
100
150
Power Generationat BUB1 (MW)

200

Fig.5 Real-time Price of Reactive Power vs. Power Generation at

Bus 1
0

12

18

24

Hours

Fig.2 Variations of Real-time Price of Active Power at Bus 3 for a

24 Hour Period

A reduction of reactive power generating capacity at Bus 3

has a much greater affect on real-time prices of reactive power,
especially at Bus 3, than on the real-time prices of active power. The
effects of tightening the constraint on reactive power generation
capacity
at B~~ 3detaaTe
rtsulli
in figures6 through 1

27

Figures 6 and 7 show the effects of decreasing the reactive

generating capacity of the generating unit at Bus 3 on the real-time
prices of active and reactive power. Figures 8.9, and 10 show the
effects on active power de,mand. reactive power demand, and the
revenue, costs and profits of the utility, respectively. Figure 11
shows that the revenue, and hence profit, of the reactive power
generating plant alone initially increases due to increasing prices but
then falls as the quantity produced is reduced more than the
corresponding rise in prices.
(b) Transmission Limits:
Transmission limits affect real-time prices of reactive power
much in the same way as it does real power prices. When the power
flow constraint on a line is made increasingly tight, the prices of real
and reactive power on the receiving end of the line also increase.
This is because the line flow constraint forces the use of a higher
loss path to satisfy the demand requirements of the bus at the
receiving end of the line, and may also require the reallocation of
generation which would increase total operating costs.
(c) Voltage limit:
The greatest impact on the real-time prices of reactive power
as well as the generation and consumptionpattem of reactive power
by the utility and customers is due to voltage constraints. This is
because voltages are affected mainly by reactive power flows and
voltage constraints are usually relieved by adding sources of reactive
power.

-0.0

-0.2

-0.4

-0.6

Busl

Bus2

Bus3
Bus4

-0.8

10

20

40

30

Reactive Power Generationat Bus 3 (MVAR)

Fig.8 Change in Active Power Demand vs. Reactive Power

Generation at Bus 3

Busl
Bus2
9 Bus3
+ Bus4
+b

cz

321+ 31:
0

.
10

20

d
I

40

30

4
-'
-5

0.8

P,

10

20

40

30

Reactive Power Generationat Bus 3 (MVAR)

Fig.6 Real-time Price of Active Power vs.Reactive Power

Generation at Bus 3
0

+-

Reactive Power Generationat Bus 3

Busl
Bus2
9 Bus3
+ Bus4
0

Fig9 Change in Reactive Power Demand vs. Reactive Power

Generation at Bus 3

Bus3
Bus4

Profit
cost
Rev.

0.6

cz

0.4

,0.2+
0

10

20

30

40

Reactive Power Oenerationat Bus 3 (MVAR)

Fig.7 Real-time Price of Reactive Power vs. Reactive Power

Generation at Bus 3

-lo!
0

10

20

30

40

Reactive Power Generationat Bus 3 (MVAR)

Fig. 10 Change in Revenue, Cost, and Profit vs. Reactive Power

Generation at Bus 3

28

The effect of tightening the voltage constraint at Bus 4 under

real-time pricing of active and reactive power are shown in Figures
12 and 13. Figure 12 shows that the real-time price of active power
rises at Bus 4 and changes very little at other buses with the
increasingly tight constraint on Bus 4 voltage. On the other hand,
the real-time price of reactive power at Bus 4 rises very rapidly with
the tightening of the constraint, as shown in Figure 13. Without
real-time pricing of reactive power and the corresponding price
responsiveness of reactive power demand, the tightening of the
voltage constraint at Bus 4 could lead to skyrocketing costs of
supplying reactive power to Bus 4 and consequent load intemption
in order to maintain the desired voltage level.
IV. COMPARISON WITH POWER F A O R PENALTIES
Reactive power pricing based on power factor penalties is
unable to provide accurate price signals to customers under voltage
constraints. In the case in question, the marginal cost of reactive
power at Bus 4 is $693.52 per MVARHr when the voltage limit is
0.966 PA., but the price of reactive power would be zero under
power factor penalties since the power factor of the customer at Bus
4 is greater than 85 percent. Under real-time pricing of reactive
power, the price of reactive power at Bus 4 would be $693.52 per
MVARHr, equal to the marginal cost. Such a high price would
provide a strong incentive for the customer to reduce reactive power
demand.Thus, power factor penalties are unable to give accurate
price signals to customers, while real-time prices provide such
signals.
Consider the case of two customers connected to Bus 4, one
large customer having a demand of 200 MW and 113 MVAR and
another smaller customer having a demand of 20 MW and 19
MVAR at the time of system peak, when the marginal cost of
reactive power is $0.56 per MVARHr at Bus 4. In order to calculate
the bill for reactive power consumption under power factor penalty,
the following billing algorithm is used for customers having power
factors below 85 percent: The total KWh for the month is multiplied
by 85 percent and divided by the average power factor for that
month for adjustment purpose. Under this penalty policy, the larger
customer who demands 113 MVAR of reactive power will not be
penalized, that is. his monthly bill for real power consumption-will
not increase due to his reactive power consumption since the
cugtomer's power factor is greater than 85 percent, namely 87
percent. On the other hand, the smaller customer would be penalized
for his demand of 19 MVAR and, if a load factor of one is assumed,
the customer's monthly bill would be 1.1724 times his bill for real
power consumption alone. This represents an increase in the
monthly bill of 17.24 percent for the smaller customer, while the
larger customer's bill does not increase. The smaller customer
effectively pays $7.26 per MVARHr while the larger customer pays
$0.00 per MVARHr, even though the larger customer is the major
consumer of reactive power. Thus, the cost burden is inequitably
shared by the customers under reactive power pricing based on
power factor penalties.
Under real-time pricing of reactive power, both customers
would pay the same real-time price of $0.56 per MVARHr. Thus,
each customer would pay in the exact proportion as the amount of
reactive power consumed by each, which results in an equitable
sharing of the cost burden. The cost imposed on a utility due to the
reactive power demand at a bus depends on the amount of reactive
power consumed and not on the power factors of the individual
customers. Hence, reactive power pricing based on power factor
penalties does not result in equitable sharing of the cost burdens
while real-time pricing of reactive power based on marginal costs
does result in equitable sharing of cost burdens.

V. CONCLUSION
The importance of an efficient reactive power pricing policy
is beginning to be recognized by the utility industry. Accurate price
signals are essential for proper investment planning by the utility and
the customers so as to maximize overall social welfare.
Real-time pricing of active and reactive power are necessary
ingredients for a successful marketplace of electricity. Such a market
would treat VARs like other market "mcdities, thus providing a
market mechanism for buving and selling VARs. This would
facilitate marketplace transactions of reactive power including
buying and selling of VARs to neighboring utilities, large industries
and independent power producers as well as to cletermine wheeling
charges for VARs.

5 1

-15
0

10

20

30

40

Reactive Powa Generationat Bus 3 (MVAR)

Fig. 11 Change in Revenue from VAR Sales at Bus 3 vs. Reactive

Power Generation at Bus 3
3oo

100

0
0.90

1
0.92

0.94

0.96

0.98

Voltage at Bus 4 @er unit)

Fig.12 Real-time Price of Active.Powervs. Voltage at Bus 4

M O1

3F

E
d

f
-200
0.90

0.92

0.94

0.96

0.98

Voltage at Bus 4 @er unit)

Fig. 13 Real-time Price of Reactive Power at Bus 4 vs. Voltage at

Bus 4

29

APPENDIX: TRANSMISSION LINE IMPEDGNCE DATA

Line,
Length
bus to
bus
km
mi

1-2
1-4
2-3
2-4
3-4

64.4
48.3
48.3
128.7
80.5

40
30
30
80
50

8
6
6
16
10

32
24
24
64
40

R
X
perunit perunit

0.042
0.031
0.031
0.084
0.053

0.168
0.126
0.126
0.336
0.210

Charging
MVAR

4.1
3.1
3.1
8.2
5.1

REFERENCES
1) Caramanis, M. C., R. E. Bohn, and F. C. Schweppe, "Spot
Pricing of Electricity: Practice and Theory", IEEE Transactions
on Power Apparatus and Systems, Vol. PAS-101, No. 9,
September 1982, pp. 3234 - 3245.
2) Bohn, R. E., M. C. Caramanis, and F. C. Schweppe, "Optimal
Pricing in Electrical Networks Over Space and Time", The Rand
Journal of Economics, Vol. 15, No. 3 (Autumn 1984), pp. 360
- 376.
3) Schweppe, F., et al, "Homeostatic Control for Electric Power
Usage", IEEE Spectrum, July 1982, pp. 44 - 48.
4) Schweppe, F. C., Caramanis, M. C., Tabors, R. D., and Bohn,
R. E., Spot Pricing of Electricity, Kluwer Academic Publishers,
Boston, MA, 1988.
5) Tabors, R. D., F. C. Schweppe, and M. C. Caramanis, "Utility
Experience with Real Time Rates", IEEE Summer Power
Meeting, 1988.
6) Garcia, E. V., and J. E. Runnels, "The Utility Perspective of
Spot Pricing", IEEE 1984 Summer Power Meeting, Seattle,
Washington, July 15 - 20, 1984. Paper 84-SM-:54-2.
7) Berg, Sanford V., J. Adams and B. Niekum, Power Factors
and the Efficient Pricing and Production of Reactive Power",
The Energy Journal, Vol. 4, Special Electricity Issue, pp. 93 102.
8) Ray, D., and F. Alvarado, "Use of an Engineering Model for
Economic Analyses in the Electric Utility Industry", Department
of Electrical and Computer Engineering, University of
Wisconsin-Madison, 1988, presented at the Advanced
Workshop on Regulation and Public Utility Economics, Rutgers
University, May 25-27, 1988.
9) Lasdon, L.S. and Waren, A.D., "Generalized Reduced Gradient
Software for Linearly and Nonlinearly Constrained Problems",
in Design and Implementation of Optimization Software, H.
Greenberg, ed., Sijthoff and Noordhoff, pubs., 1979.
Martin L. Baughman (S, 72) was
bom on February 18,1946 in
Paulding, Ohio. He received his BS
in Electrical Engineeringfrom Ohio
Northem University in 1968 and his
MSEE and PhD degrees in electrical
engineering at MIT in 1970 and 1972,
respectively.
Dr. Baughman was a Research
Associate at Massachusetts Institute of
Technology from 1972 to 1975, at
which time he joined the University
of Texas at Austin as a Senior
Research Associate. In 1976 he
joined the faculty of the Department of Electrical and Computer
Engineering as an Assistant Professor. In 1979 he coauthored a
book with Paul Joskow on electricity supply planning entitled
Electricitv in the U n i w s : Models and Policv Analv&. From
1984 to 1986 he chaired the National Research Council Committee
on Electricity in Economic Growth. He has served as a consultant
to several agencies, including Edison Electric Institute, the MIT
Energy Laboratory, the Economic Council of Canada, and the
Ministry of Planning in Saudi Arabia, and the Electric Power
Research Institute.
Dr. Baughman is a member of the Intemational Association
of Economists and registered ProfessionalEngineer in the state of
Texas.

N. Siddiai was bom in

Chittagong, Bangladesh on
September 1,1964. He received a
B.Sc. (Engineering) from Bangladesh
University of Engineering and
Technology in 1988. He received a
Master degree in Electrical
Engineering from the University of
Texas at Austin in 1989. He has been
a Graduate Research Assistant with
the Center for Energy Studies at the
University of Texas at Austin since September, 1988, where he is
pursuing a PhD in the Department of Electrical and Computer
Engineering.
His research interests are in the areas of power systems
economics, electricity pricing, and optimal power dispatch.