Pricing reactive power: Some challenges

Distributed generation as attached to market liberalization requires pricing schemes able to deliver the appropriate incentives to market participants. In particular, users should be made responsible for their reactive power. A penalty system fails in that account. One of the major challenges in setting up an appropriate pricing of reactive power consists in identifying its attached costs. Although their peculiar structure might suggest as appropriate a separate treatment of real and reactive power, we argue for a joint approach. In fact, what matters is the total financial burden each user has to support, not the way it is actually computed. A fairness criteria is introduced, according to which no user or group of users should contribute more than its stand-alone cost. When contributions exactly cover total costs, this implies that no user is a burden to the others. We evidence that this criteria is nonsensical if applied to only part of the costs. We conclude by proposing a pricing rule that always complies with our fairness requirements. Its practical implementation is presented and applied to an illustrative example. Tariff penalties for lack of power factor compensation are analyzed for two energy suppliers, one in Europe, the other in North America. They are shown to (possibly) fail to comply with our fairness criteria.