Abstract Power industry has been facing restructuring problems during the past decade. Appropriate management of reactive power is very essential for supporting power system security. Reactive power has dominant effects on real energy transfer. Furthermore, it can support the secure operation of the system as an ancillary service. However, most researches have been focused on active power as the main good transacted in electricity markets. On the other hand, while reactive power production cost is highly dependent on real power output, it is mainly confined to local consumption. As a result, to avoid market power and to maintain the secure operation of the system, a fair cost allocation method seems to be very essential. Appropriate pricing of reactive power as an ancillary service has been a challenging problem during the past decade. However, most methods proposed so far for reactive power pricing are essentially based on empirical approximations. In this paper, a new method for reactive power cost allocation is proposed. The method is based on calculation of the accurate cost which will be imposed on generators due to supporting reactive power. The proposed method is fair, accurate and realistic and it can be formulated very easily. Furthermore, a new approach based on tracing algorithm is proposed for pricing of reactive power which considers the cost of both active and reactive losses allocated to each generator. Application of the proposed method on IEEE 9-bus standard network confirms its validity and effectiveness.

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