White Paper: Global Reactive Power Tariffs and Market Trends (February 2025)

Executive Summary

Reactive power management is a crucial aspect of modern electricity markets, impacting grid stability, energy costs, and market efficiency. This white paper provides an in-depth analysis of reactive power tariffs across India, Europe, North America, Canada, and Mexico, highlighting key regulatory changes, market trends, and practical use cases. With evolving energy landscapes and increasing integration of renewable energy sources, regulatory bodies are revising their compensation mechanisms to balance cost efficiency and grid reliability.

India

India's Central Electricity Regulatory Commission (CERC) has proposed new tariff regulations for the period from April 1, 2024, to March 31, 2029[1]. While these regulations don't specifically mention reactive power tariffs, they include several changes that may indirectly affect reactive power costs:

  1. Return on Equity (ROE) for new transmission lines reduced to 15% from 15.5%[1].
  2. ROE increased to 17% for new storage-type hydro power projects, pumped-storage hydro projects, and run-of-river generating stations with pondage[1].
  3. Additional incentive income for thermal projects at 1% of annual fixed-revenue requirements[1].
  4. Peak-period incentive income for thermal assets increased to 75 paise/kilowatt hour from 65 paise/kilowatt hour[1].

Europe

The European Union has implemented new Electricity Market design rules, which member states were required to transpose into national law by January 17, 2025[2]. While these rules don't directly address reactive power tariffs, they aim to make energy prices more stable and less dependent on fossil fuel prices. Key changes include:

  1. Energy costs more reflective of cheaper renewable energy[2].
  2. More predictable energy costs[2].
  3. Wider choice of consumer contracts and clearer information[2].
  4. Option for consumers to lock in secure, long-term prices[2].

North America (United States, Canada, and Mexico)

In North America, particularly the United States, there are ongoing discussions about changes to reactive power compensation:

  1. The Federal Energy Regulatory Commission (FERC) has proposed eliminating reactive power compensation for generation resources within the standard power factor range of .95/.95 leading/lagging, also known as the "deadband"[6].
  2. If implemented, this proposal would significantly reduce both the opportunity to receive compensation for reactive service and the amount paid for such service[6].
  3. Transmission providers would only be required to provide compensation for reactive power when they ask the generation owner to operate its facility outside of the standard power factor range[6].
  4. The proposal states that within 90 days after transmission owners submit their revised tariffs implementing the changes, all compensation for reactive service within the deadband will be terminated prospectively[6].

Regional Practices in North America

  • PJM Interconnection: Prior to FERC's 2024 ruling, PJM compensated generators for reactive power within the standard power factor range. In 2023, PJM reported payments totaling $388 million for reactive capability[6].
  • ISO New England (ISO-NE): Between 2018 and 2023, annual payments for reactive supply and voltage support services ranged between $18 million and $20 million. These payments accounted for approximately 0.25% of the total value of all energy, ancillary service, and capacity market costs during that period[6].
  • New York Independent System Operator (NYISO): In 2023, NYISO's payments for reactive capability amounted to $75 million[6].
  • Orange & Rockland Utilities (New York): Large commercial customers are charged when their power factor falls below 95% to reduce energy losses and promote grid efficiency[6].

Canada

Canada's electricity market is regulated at the provincial level, with different approaches to reactive power tariffs. Key developments include:

  1. Ontario: The Independent Electricity System Operator (IESO) manages reactive power compensation, and changes to ancillary service payments are under review for 2025.
  2. Quebec: Hydro-Québec has implemented a penalty structure for industrial consumers whose power factor falls below 0.90.
  3. Alberta: The Alberta Electric System Operator (AESO) is considering adjustments to reactive power compensation in line with evolving grid requirements.

Mexico

Mexico's electricity market, managed by the Comisión Federal de Electricidad (CFE) and Centro Nacional de Control de Energía (CENACE), is also undergoing changes related to reactive power tariffs:

  1. CFE Tariff Adjustments: CFE has proposed introducing stricter penalties for industrial and commercial consumers with low power factors.
  2. Market Reform Discussions: Ongoing discussions about electricity market reforms may include changes to reactive power compensation mechanisms.

Use Cases

  1. Industrial Sector: Large manufacturing facilities with high reactive power demand implement power factor correction methods to avoid penalties and improve energy efficiency.
  2. Renewable Energy Integration: Wind and solar farms require reactive power management to maintain grid stability, often relying on capacitor banks and voltage regulation technologies.
  3. Smart Grid Applications: Utilities leverage automated voltage control systems to optimize reactive power flow, reducing transmission losses and enhancing overall grid reliability.

Future Outlook and Recommendations

Key Trends

  1. Decentralized Energy Systems: With the rise of distributed energy resources (DERs), including solar and battery storage, the demand for reactive power management at the distribution level is increasing.
  2. Advanced Grid Technologies: Smart inverters and automated voltage regulation systems are playing a critical role in reactive power compensation.
  3. Policy Harmonization: There is a growing need for consistent and transparent reactive power pricing models across regions to ensure fair compensation and cost allocation.

Recommendations

  1. Standardized Regulatory Frameworks: Governments and regulatory bodies should collaborate to establish common methodologies for reactive power compensation.
  2. Investment in Smart Grid Technologies: Utilities should adopt automated voltage control solutions to optimize reactive power flow and reduce inefficiencies.
  3. Consumer Education and Incentives: Industrial and commercial consumers should be encouraged to implement power factor correction techniques through incentives and awareness programs.

Conclusion

Reactive power compensation practices in India, Europe, and North America are evolving due to regulatory changes and a shifting energy landscape. These changes reflect broader efforts to integrate renewable energy, enhance cost efficiency, and refine market structures.

Citations

[1] https://www.spglobal.com/ratings/en/research/articles/240109-india-s-proposed-power-tariff-review-clears-path-for-investment-credit-continuity-12964821 [2] https://energy.ec.europa.eu/news/electricity-market-design-deadline-transposing-new-rules-national-law-2025-01-17_en [6] https://www.powermag.com/ferc-proposal-would-cut-reactive-power-compensation-a-potential-hit-to-independent-power-producers-revenue-mix/

 

 IASR REFERENCES:

!.0 Grid Edge Control  Overview Paper  https://link.springer.com/article/10.1007/s00202-020-01209-x