FERC Moves to Eliminate Reactive Power Compensation

Summary:
The Federal Energy Regulatory Commission (FERC) proposes to revise Schedule 2 of its pro forma open-access transmission tariff (pro forma OATT), section 9.6.3 of its pro forma large generator interconnection agreement (LGIA), and section 1.8.2 of its pro forma small generator interconnection agreement (SGIA) to prohibit compensation of related to the provision of reactive power within the standard power factor range by generating facilities.  Operating “within the standard power factor range” refers to a generating facility providing reactive power within the power factor range set forth in the generating facility’s interconnection agreement when the unit is online and synchronized to the transmission system.  Transmission providers would be required to pay an interconnection customer for reactive power only when the transmission provider asks the interconnection customer to operate its facility outside the standard power factor range set forth in its interconnection agreement.  Comments from interested parties are due on or about May 20, 2024. 

In Order No. 2003, FERC specifically addressed the circumstances and way a transmission provider must pay for reactive power, inside and outside the standard power factor range (sometimes referred to as the “deadband”).  In Order No. 2003, FERC adopted a standard agreement for the interconnection of large generating facilities (the pro forma LGIA), which included the requirement that interconnection customers maintain a composite power delivery at continuous rated power output at the point of interconnection at a power factor within the range of 0.95 leading to 0.95 lagging[1] when synchronized to the transmission system, unless the transmission provider has established a different power factor range.  Order No. 2003 required that a transmission provider compensate an interconnection customer for the provision of reactive power when the transmission provider requests the interconnection customer to operate its generating facility outside the established power factor range.  With respect to reactive power within the established power factor range, FERC initially concluded that the interconnection customer should not be compensated for reactive power when operating within the range established in the interconnection agreement because doing so “is only meeting [the generating facility’s] obligation.”[2]  But in Order No. 2003-A, FERC clarified that “if the Transmission Provider pays its own or its affiliated generators for reactive power within the established range, it must also pay the Interconnection Customer.”[3]  This standard is generally referred to as the comparability standard.  As part of this NOPR, FERC proposes to remove from the pro forma LGIA and pro forma SGIA the requirement that a transmission provider pay an interconnection customer for reactive power within the standard power factor range if the transmission provider pays its own or affiliated generators for the same service.
 
In early 2023, MISO made a similar change to its reactive power compensation under Schedule 2, eliminating payments generators were receiving for the capability to provide reactive power and paying only for reactive power provided outside the deadband when called upon by MISO.  SPP uses the compensation model that FERC is proposing in this NOPR.  CAISO does not pay for reactive power, even when it requests a generator to provide reactive power services outside the deadband.  ISO-NE and the NYISO have system-wide stated rates by which they compensate generators for reactive power.  PJM is the only RTO today that compensates a generator for reactive power capability within the deadband and beyond to the generators full reactive power capability based upon its reactive power revenue requirement approved by FERC.  Thus, this NOPR will greatly impact the reactive power compensation in PJM. 
 
Decision Rational:
FERC treats the provision of reactive power within the standard power factor range differently from that outside the standard power factor range.  Where reactive power is provided outside of the standard power factor range, it is considered “an ancillary service for transmitting power across the grid to serve load.”[4]  By contrast, where the generating facility is operating within the standard power factor range, “it is meeting its obligation as a generator to maintain the appropriate power factor in order to maintain voltage levels for energy entering the grid during normal operations.”[5]  “Put differently, reactive support by generating facilities operating within the standard power factor range ensures that when these facilities inject real power—the product that their facilities exist to create and sell—onto the grid under normal conditions, they can do their part to maintain adequate voltages and to not threaten reliability.”[6]
 
FERC also has found that a transmission provider’s decision to end compensation for reactive power within the standard power factor range did not compromise an IPP’s ability to recover costs that they may incur in producing reactive power within such range.  FERC stated that such generating facilities “may be able to recover such costs in other ways—such as through higher power sales rates of their own.”[7]  To the extent that it could be argued that such recovery was not feasible for IPPs, FERC has found that such arguments lacked plausibility “since the incremental cost of reactive power service within the deadband is minimal.”[8]  FERC explained that “[t]he purpose for which generation assets are built (including reactive power capability to maintain voltage levels for generation entering the grid) is to make sales of real power.”[9]
 
By contrast, but outside the scope of this rulemaking[10], the production of reactive power outside of the standard power factor range, for which transmission providers are required to provide compensation, may result in increased costs, including opportunity costs to the generating facility.  As such, if the transmission provider requires a generating facility to provide reactive power outside of the standard power factor range, the generating facility may have to reduce its MW output to comply with such an instruction, which could limit the generating facility’s opportunity to receive compensation for real power sales.
 
In this NOPR:

1. FERC preliminarily finds that prohibiting transmission providers from including in their transmission rates any charges associated with the supply of reactive power within the standard power factor range from a generating facility is just and reasonable because compensation for providing reactive power within the standard power factor range is unnecessary to maintain reliability;
2. FERC preliminarily finds that it is both more efficient and less administratively burdensome for generating facilities to recover any identified reactive power costs, to the extent they exist, through energy and capacity sales,[11] since competition between generating facilities may incentivize efficiency.[12]  Another benefit of any such market-based compensation in RTOs/ISOs is that any costs of providing reactive power within the standard power factor range would be more transparent to market participants because they would be included in RTO/ISO energy or capacity prices as opposed to generating facility-specific out-of-market cost-of-service agreements;
3. FERC preliminarily finds that cessation of payments for reactive power within the standard power factor range set forth in FERC’s pro forma LGIA and SGIA does not compromise an IPP’s ability to recover costs that it may incur in producing reactive power within such range because generating facilities have the opportunity to recover such costs in other ways, “such as through higher power sales rates of their own.”[13]    
4. FERC seeks comment on whether and, if so, how the elimination of separate reactive power payments will affect generating facilities’ ability to recover their costs in the markets that currently provide reactive power compensation within the standard power factor range;
5. FERC also seeks comment on whether, and if so how, eliminating separate reactive power compensation within the standard power factor range may affect investment decisions to build, or finish building, generation facilities, and whether, and if so how, the elimination could otherwise affect generators’ business decisions in those markets; and
6. FERC seeks comments on the following:

1. Is a transition period necessary?  Please provide discussion supporting any opinion;
2. What factors, if any, such as potential business or investment impacts, should be considered in determining whether any transition period is appropriate, how any transition period for reactive power compensation may be structured to minimize impacts, and for what duration any transition period should last?  Absent a transition period, would the final rule disrupt business and investment decisions or not?  If so, what transition mechanisms other than delaying the implementation date of the final rule would minimize such disruptions and be just and reasonable;
3. For regions that have an established capacity market, should transmission providers be allowed to make the implementation date of their compliance filing align with the region’s capacity market timelines to allow costs associated with reactive power production, if any, to be incorporated into capacity market bids?  Would a different transition mechanism, if any, be necessary for regions without a capacity market?  Would it be unduly discriminatory or preferential to set different implementation dates for the final rule in different markets and regions; and
4. If FERC allows existing generation resources that have previously received compensation for reactive power supply to continue to receive compensation for a limited period while prohibiting new generation resources from receiving reactive power compensation, how should it determine eligibility for continued compensation in a manner that is just and reasonable and not unduly discriminatory or preferential?

 
FERC proposes to require each transmission provider to submit a compliance filing within 60 days of the effective date of the final rule in this proceeding revising its OATT, pro forma LGIA, and pro forma SGIA, as necessary, to comply with the requirements set forth in any final rule issued in this proceeding.  In addition, FERC proposes allowing 90 days from the date of the compliance filing for implementation of the proposed reforms to become effective.


[1] A generating facility’s leading reactive power indicates its ability to absorb reactive power and its lagging reactive power indicates its ability to produce reactive power.
[2] Order No. 2003, 104 FERC ¶ 61,103 at P 546 (“We agree that the Interconnection Customer should not be compensated for reactive power when operating its Generating Facility within the established power factor range, since it is only meeting its obligation.”).
[3] Order No. 2003-A, 106 FERC ¶ 61,220 at P 416.  Section 9.6.3 of the pro forma LGIA provided as follows:
Transmission Provider is required to pay Interconnection Customer for reactive power that Interconnection Customer provides or absorbs from the Large Generating Facility when Transmission Provider requests Interconnection Customer to operate its Large Generating Facility outside the range specified in Article 9.6.1, provided that if Transmission Provider pays its own or affiliated generators for reactive power service within the specified range, it must also pay Interconnection Customer.
Similarly, section 1.8.2 of the pro forma SGIA provided as follows:
The Transmission Provider is required to pay the Interconnection Customer for reactive power that the Interconnection Customer provides or absorbs from the Small Generating Facility when the Transmission Provider requests the Interconnection Customer to operate its Small Generating Facility outside the range specified in article 1.8.1.  In addition, if the Transmission Provider pays its own or affiliated generators for reactive power service within the specified range, it must also pay the Interconnection Customer.
[4] See, e.g., METC, 97 FERC at 61,852-53 (emphasis added); MISO Rehearing Order, 184 FERC ¶ 61,022 at PP 23-24.
[5] METC, 97 FERC at 61,852-53; see also MISO Rehearing Order, 184 FERC ¶ 61,022 at PP 23-24; BPA, 120 FERC ¶ 61,211 at P 19; cf. Dynegy Midwest Generation, Inc., 125 FERC ¶ 61,280, at P 16 (2008) (“Reactive power is a localized service that is quickly used by transmission system components and cannot be transported over long distances.”).
[6] MISO Rehearing Order, 184 FERC ¶ 61,022 at P 23.
[7] Id. P 21 (citing Sw. Power Pool, Inc., 119 FERC ¶ 61,199 at P 39).
[8] Id.
[9] Id.
[10] I am not sure why this is outside the initial notice of inquiry on reactive power compensation. 
[11] See MISO Rehearing Order, 184 FERC ¶ 61,022 at P 42 (dismissing Vistra’s claim that they would be unable to recover any costs attributable to providing reactive service through mechanisms other that Schedule 2, such as in energy offers and capacity offers.  FERC noted that “[a]s to capacity offers, among the ‘going forward’ costs that can be recovered are ‘mandatory capital expenditures necessary to comply with federal . . . reliability requirements,’ which would appear to include any (hypothetical) capital investments and expenditures associated with Reactive Service. 
[12] For example, in PJM, capital costs are included in the Net Cost of New Entry (Net CONE) parameter of the Variable Resource Requirement (VRR) curve in the capacity market and the Net CONE parameter directly affects clearing prices by affecting both the maximum capacity price and the location of the downward sloping part of the VRR.  As a result, if FERC were to eliminate reactive power compensation within the standard power factor range, the only change that would be required would be to exclude the reactive power revenues from the Net CONE parameter and to exclude any reactive power revenues from the energy and ancillary services offset from the offer caps for resources that provide reactive power.  See PJM IMM Initial Comments at 21-22, 25.
[13] Id.