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What Is Reactive Power and Why Does It Matter?

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Reactive power is critical to maintaining voltage levels on the transmission system.

But, what exactly is it? 

Using an analogy to a municipal water system, think of voltage as equivalent to water system “pressure” - without it water just sits in the pipes and, with too much, pipes explode. So, it's vital that water pressure is constant and consistent. 

Voltage plays a similar role on the electric system in ensuring the stability of power flows. However, the consequences of not maintaining voltage on the electric system are far more dire, in that voltage collapse can severely damage generation, transmission and distribution equipment, and result in widespread cascading blackouts.

Reactive power is either generated or absorbed by electric generators (or, in some cases, devices known as "capacitors") to maintain a constant voltage level, commonly referred to as providing “voltage support.” Generators providing voltage support often suffer heating losses that result in a reduced ability to generate “real” power. We are all more familiar with real power: it lights light bulbs, turns motors and charges iPhones. Critically, real power is what is compensated in RTO wholesale electric markets. Thus, when generators are ordered by system operators to generate or absorb reactive power to support voltage, they trade off their ability to generate real power and earn RTO market revenues. The calculated margin on these foregone market revenues is paid to generators providing voltage support through out-of-market payments.

The primary challenge of utilizing reactive power to manage voltage is that reactive power does not travel as far as real power in an electric system. In many cases the cheapest sources of real power are located remotely from load centers, and system operators have to monitor voltage levels within the load centers to ensure a constant voltage level is maintained. If voltage levels become too high or too low, generators within the load center operate to stabilize voltage levels by generating or consuming reactive power. 

The issue of reactive power has come to the forefront in PJM Interconnection's territory. As PJM’s footprint has expanded, and operating cheaper remote generation to serve load centers has become more common, PJM has enhanced its voltage monitoring capabilities through the implementation of Transfer Interfaces. Such interfaces measure power flows across select high voltage transmission lines into remote load centers to indicate when additional local generation (within the load center) is necessary to maintain voltage levels. 

Until a few years ago, the ability to generate reactive power was largely taken for granted in PJM. Voltage support was typically provided by legacy baseload generating stations that had long since paid for the capital cost of the equipment necessary to provide this service, either through a historic regulated ratebase or PJM tariff provisions that allow for the recovery of such costs. 

Two trends have upended the status quo. First, as natural gas prices have declined, the baseload generation facilities that have historically provided voltage support (i.e. coal plants) are no longer running as consistently or economically. In some cases, they have been started and run at a loss in order to provide reactive power. Second, due to economics and impending environmental regulations, many of the same baseload generating facilities have now requested retirement. These trends have resulted in substantial out-of-market payments to those baseload generators as they were dispatched solely to provide voltage support. In certain instances, Reliability Must Run contracts were utilized to keep generating facilities online in order to provide reactive power, including some coal units in Pennsylvania.

So, what does this all mean for our customers going forward?  

As out-of-market payments for voltage support and retirement requests have stacked up, PJM has undertaken transmission system upgrades to mitigate the underlying voltage issues, the costs of which have been borne by ratepayers. The development of such upgrades is expected to continue. 

PJM is now beginning discussions to model reactive power needs in its Day Ahead and Real Time markets, meaning market prices could begin to reflect reactive power. Additionally, with the increase in distributed resources, there is an increased focus on ensuring adequate reactive capability exists, especially given high solar penetration requires more reactive power. This could lead to the need for capital cost recovery through markets or PJM tariff schedules. As FERC focuses on price formation – which is in some sense code for finding additional revenues for generators in an era of low natural gas prices – there is a possibility that reactive power will become a more explicit product that requires additional compensation. 

Stay tuned to the Direct Energy Business Blog for further policy and regulatory developments. Read about how California Senate Bill 380 may potentially impact natural gas prices in Southern California.

Posted: May 23, 2016

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