FERC Seeks Comments On Potential Alternative Reactive Power Compensation Mechanisms In Reactive Power Capability Compensation, 177 FERC ⁋ 61,118 (2021) ("NOI")

Published date25 November 2021
Subject MatterEnergy and Natural Resources, Energy Law, Renewables
Law FirmSheppard Mullin Richter & Hampton
AuthorMr Mark F. Sundback and Andrew Mina

Introduction: On November 18, 2021, the Federal Energy Regulatory Commission ("FERC" or "Commission") issued a notice of inquiry seeking comments on various aspects of currently accepted reactive power compensation mechanisms and alternative compensation methodologies, including for those resources that interconnect at the distribution level but offer reactive power capability in support of transmission. The NOI may foreshadow FERC's adoption for the first time of a uniform standard for reactive power compensation, displacing the current fragmented reactive power federal pricing environment.

Why you are affected: Proposals to the Commission may urge setting reactive power rates based upon: more accurate assessments of individual facilities' costs;1 an average of regional costs; "fleet" costs;2 performance criteria;3 temporal factors, such as time of day or seasonal differentiations; rate caps; safe harbor rates with an option to justify an individual facility's higher costs; replacement value; locational value; other bases; or proposals to entirely eliminate separate reactive power rates.4 The NOI likely will involve not only the traditional utility rate debate of fairness versus efficiency, but also differing perspectives on: who is the true "cost causer"; whether solar and wind resources should be subject to specific rule changes;5 the impact of reactive power pricing on transmission system development and new generation assets' location; whether some form of dynamic pricing would be desirable or administratively infeasible; and whether a single rate or compensation methodology would properly incent the siting of reactive power resources where they are most needed. Different types of reactive power providers (to say nothing of consumers) will disagree on the proper method for pricing reactive power. For instance, low cost providers might prefer a "flat rate" (see, e.g., NOI at P 30) regional average price, allowing them additional margin above a strict cost-based, facility-specific rate. Higher cost providers could be disadvantaged by such a compensation program. Similarly, some participants may focus on arbitrage opportunities created by separate reactive power pricing regimes.

The NOI may impact generation resource owners, developers, investors and transmission customers because reactive power compensation (i) may involve significant revenues or costs for such participants, (ii) may eliminate or reduce FERC proceedings otherwise regularly set for...

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