Abstract: Reactive power management plays an essential role in the secure operation of the power system as an ancillary service. Although in electricity markets, the particular attention is paid to active power, the reactive power also plays an important on total generation costs of electricity. On the other hand, as it is mainly confined to local consumption, to avoid market power and maintain the secure operation of a power system, accurate reactive power pricing and cost allocation methods are essential. It 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 the calculation of accurate cost imposed on generators 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 and cost of capacitor banks. To validate the performance of the proposed method, it is applied to both 9-bus and 30-bus IEEE test systems.

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