May 8, 2024

FERC Proposes Prohibiting Reactive Power Compensation

On March 21, 2024, the Federal Energy Regulatory Commission (FERC) proposed rulemaking [1] that will change the way in which generators receive compensation. Specifically, FERC proposed to prohibit compensation for reactive power produced within the standard power factor range.

Though it has been the standard for transmission providers to compensate generators for reactive power, FERC decided that this compensation is unjust and unreasonable. [2] The proposed rule states that:

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. [3]

FERC’s reasoning behind the proposed rule is that reactive power is a generator’s cost of doing business. Put more simply, a generator is “meeting its obligations” by producing reactive power if it wants to provide customers with reliable and efficient power. [4] However, FERC does not propose to prohibit reactive compensation for reactive power produced outside of the standard power factor range.

FERC has included several rationales in the proposed rule for why reactive power compensation is unjust and unreasonable: (1) there is little to no cost for the generators for production of energy within the standard power factor range;[5] (2) any cost associated with reactive power can be recovered through energy or capacity sales;[6] (3) in regions that have not compensated generators for reactive power, there is no evidence that generators have had any issues recovering costs or providing power;[7] and (4) allowing generators to be compensated for reactive power has resulted in unjust and unreasonable transmission rates. [8]

While the compensation for reactive power is a relatively low amount, generators will need to prepare and plan for this change in their interconnection agreements. Currently, there are no transitional measures in place to ease the burden on generators, but FERC is seeking comments on what, if any, transitional measures are needed, as well as how the rule may affect generators’ ability to provide power. [9] Comments are open until May 28, 2024.

If you have any questions about the FERC’s new rule and the impact it may have on your business, reach out to a member of SGR’s Energy Law practice group.

[1] Compensation for Reactive Power Within the Standard Power Factor Range, 186 FERC ¶ 61, 2023 (2024) (NOPR).

[2] Id. at P 25.

[3] Id. at P 1.

[4] Id. at P 4.

[5] Id. at P 6.

[6] Id. at P 6.

[7] Id. at P 7.

[8] Id. at P 9.

[9] Id. at P 49.

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