Markets for Reactive Power and Reliability: A White Paper

This analysis addresses that issue, but in the much broader context of determining an optimal bulk power supply system, both in terms of such a system's operation and of its investments for capacity in transmission lines, generation, and capacitors. This broad, integrated perspective is required because of the complex interactions between individual aspects of the electricity supply system. By using the economic objective of maximizing net benefits to society (gains from consumption of electricity that is reliably provided at stable voltages minus the cost of efficient provision), we not only determine optimal levels of energy consumption and installed capacity of facilities but also estimate the socially optimal level of reliability endogenously by weighing its benefits and costs. By adopting the perspective of a benevolent social planner, the analysis identifies the decisions that can be decentralized and determined efficiently through markets and the services that, because they have public-good-like attributes, require some intervention by a central authority to properly provide that aspect of the electric power supply.