Effects of neglecting volt/VAR optimization on marginal cost-based pricing for wheeling transactions and independent power producers

Abstract Practical implementation of open transmission access will require a pricing policy for wheeling transactions and independent power producers that will ensure economic and secure power system operation. Various pricing schemes have been proposed, but typically without accounting for the cost of producing reactive power in a direct manner. In this paper, a marginal cost-based pricing philosophy that offers insight into an appropriate new price component associated with reactive power is presented. Under the proposed philosophy, compensation is provided to those producers of reactive power who participate in achieving the required system VARs. The proposed method and the effects of neglecting the voltage/VAR optimization problem is demonstrated on the IEEE 6- and 30-bus test systems for wheeling transaction and independent power producer pricing.