What is the Future of Reactive Compensation

Author: Frank Swigonski, Director, Market Design

Utilities across the country have seen an increase in new renewable generators coming online. For utilities that compensate reactive power using AEP, more new generation translates to an increase in FERC filings and individual hearings and settlements. The administrative burden on generators, utilities, consumer advocates, and FERC is substantial and increasing every year. Many utilities have sought to reduce the burden by proposing to replace AEP with a flat rate or to eliminate compensation for reactive power altogether. For example, FERC recently accepted a proposal by transmission owners in the Midcontinent Independent System Operator, Inc. (MISO) service territory to eliminate reactive power compensation for both existing and new resources.  Generators have challenged FERC’s determination and the proceeding will almost certainly result in litigation in federal appellate courts.

In addition, new renewable generators are inverter-based and consequently have different reactive capabilities and cost profiles than traditional generators. Inverters with better reactive capability cost more. While AEP provides cost-based compensation and ostensibly permits generators to recover the cost of investment in additional capability, it was not designed to incentivize this behavior. As traditional generation retires, utilities must ensure that new generation has the same or better reactive capability as the generation it is replacing.  

For these reasons, FERC recently issued a Notice of Inquiry (NOI) that seeks to investigate how reactive power compensation can be standardized to reduce administrative burdens while also incentivizing investment in reactive capability especially for inverter-based resources. FERC may ultimately propose a rulemaking based on the record it has built in the NOI and, ultimately, issue a final rule establishing a standard compensation mechanism for reactive power.

In PJM, stakeholders are currently exploring reforms to reactive power compensation. There are several proposals moving through the stakeholder process, some of which would substantially reduce or eliminate reactive power compensation as a distinct revenue stream. Pine Gate Renewables is leading a coalition of renewable energy companies in an effort to preserve reactive power compensation, while simultaneously reducing the administrative burden associated with the current process. PJM will ultimately adopt one of the proposals in the stakeholder process and file it at FERC, likely happen in Q3 or Q4 of 2023.  Pine Gate Renewables remains optimistic that we will achieve a positive result in the PJM stakeholder process.  While the company is optimistic about the future of reactive power revenues for transmission-connected resources, it is important to note that it is unlikely that distribution-connected resources will be eligible for reactive power compensation in the future.