On November 18, 2021, FERC issued a Notice of Inquiry (NOI) seeking comments on reactive power capability compensation and market design.  (Link to NOI here). Reactive power is a critical component of the bulk electric system. Almost all bulk electric power is generated, transported, and consumed in AC networks. These AC systems consume both real and reactive power. Reactive power supports the voltages necessary for system reliability to allow the supply of real power from generation to load. All balancing authorities must procure enough sources of reactive power to safely manage the grid and generator interconnection agreements contain provisions requiring generators to operate within certain reactive power limits. Reactive power is an ancillary service and costs are recovered separately from the cost of standard transmission service.

In 1999, in Opinion No. 440, the Commission approved a method, proposed by American Electric Power Service Corporation, for allocating costs for a synchronous generator between real and reactive power capability. This AEP Methodology is now recommended by the Commission when an entity seeks to recover reactive power capability costs. The AEP Methodology works by first identifying the construction costs of real and reactive power equipment. The reactive power equipment is then isolated using FERC-approved allocators. Lastly, these costs are multiplied by a carrying charge to calculate the annual reactive power revenue requirement.

Over the last decade, reactive power compensation has become a key component in cost recovery for renewable resources, and the AEP methodology has been applied to non-synchronous generators such as solar and wind facilities. The NOI recognizes this shift in the industry. Reactive power compensation is highest in the Midcontinent Independent System Operator (“MISO”) and PJM Interconnection, L.L.C. (“PJM”) footprint, where reactive power is compensated via a fixed payment. In the NOI, the Commission noted that it has processed 260 reactive power proceedings in PJM and 125 reactive power proceedings in MISO. The majority of these proceedings involve renewable resource generators.

In the NOI, the Commission is seeking comments on the applicability of the AEP Methodology to renewable resources. The AEP Methodology was initially developed for synchronous generators and the Commission seeks to examine the appropriateness of its application to non-synchronous generators. Specifically, the Commission seeks comments on:

  1. the failure of the AEP methodology to account for the degradation of a resources’ reactive power capability over time;
  2. the applicability of the cost-of-service ratemaking principles in the AEP methodology to the categories of equipment unique to non-synchronous generators;
  3. the lack of specific accounts in the Uniform System of Accounts for non-hydro non-synchronous resources;
  4. the lack of verifiable data underlying the cost-of-service rates. A majority of the reactive power applicants have been granted waivers from the Commission’s accounting and reporting requirements, so these applicants do not have accounting entries as found in the FERC Form No. 1 to support the reactive rates;
  5. Whether the PJM compensation model for reactive power should be revised due to overcompensation. The PJM market monitor has argued that reactive power compensation should not be provided via a separate cost-of-service compensation model and instead, should be determined based on capacity markets in PJM. Alternatively, the PJM market monitor argues that the current scheme should be revised to avoid overcompensating resources for reactive power capability.

FERC also seeks comment on (i) alternatives to the AEP methodology, particularly with respect to different resource types; (ii) the various compensation models across the RTO/ISOs; and (iii) whether resources connected to a distribution system should be eligible for reactive power capability compensation through transmission rates.

Initial Comments are due January 31, 2022, and Reply Comments are due February 28, 2022.

For additional energy regulatory updates, see our weekly energy regulatory update, or sign up for the distribution list.