FERC Order 904 Eliminates Reactive Power Payments Across U.S. Grid by June 2026
- Power Factor Power Quality Regulatory
Marin Holt
- 1
- 7 minutes read
- FERC Order 904 eliminates reactive power payments within the 0.95 leading to 0.95 lagging standard range
- Order issued October 17, 2024; effective January 27, 2025 after Federal Register publication
- PJM implements full elimination for all resources by June 1, 2026
- FERC determined prior payments had no economic basis and cost ratepayers hundreds of millions annually
- Generators challenging the order in Fifth Circuit through five consolidated cases
FERC Order 904 eliminates compensation for generators providing reactive power within the standard power factor range of 0.95 leading to 0.95 lagging. PJM, the largest U.S. grid operator serving 65 million people across 13 states, will wholly eliminate reactive power compensation for all resources by June 1, 2026. The order ends payments that FERC determined had “no economic basis” and cost ratepayers hundreds of millions of dollars annually.
What the Order Changes
Before Order 904, generators in most regions received compensation for maintaining voltage through reactive power output, even within the standard operating range that interconnection agreements already require. FERC found these payments “unjust and unreasonable” because generators produce reactive power as an inherent byproduct of synchronous generation. The 0.95/0.95 leading/lagging deadband defines the range where no additional compensation applies. Generators still receive payment when transmission providers specifically request operation outside this deadband for voltage support.
The order applies to all FERC-regulated regions. ISO New England and NYISO previously compensated generators based on size and reactive capability. California and the Southwest Power Pool had no compensable reactive power product. PJM required formal ratemaking proceedings for reactive power rates. Order 904 standardizes the approach: no payment within the deadband, period.
Why This Matters
Reactive power compensation flowed directly into wholesale electricity costs passed to end users. Eliminating these payments reduces transmission rates for industrial facilities, data centers, and commercial buildings that consume large amounts of reactive power. For facilities operating capacitor banks or power factor correction equipment, the change alters the economic calculation. Generators that previously relied on reactive power revenue face reduced income streams, particularly older thermal plants in regions like PJM where wholesale power costs jumped 54% in 2025 to $67 billion.
The timing intersects with PJM’s capacity price surge to $329.17 per MW-day for the 2026-2027 delivery year, up from $28.92 per MW-day two years earlier. Generators losing reactive power revenue face pressure from both the compensation elimination and market volatility.
Legal Challenges and Implementation
On September 26, 2025, the D.C. Circuit Court of Appeals vacated FERC’s approval of MISO’s immediate elimination of reactive power compensation. In Capital Power Corporation v. FERC, the court found FERC acted “arbitrarily and capriciously” by failing to consider whether generators deserved a transition period. MISO had eliminated compensation the day after filing, bypassing the standard 60-day notice requirement. The court ruled that FERC’s single-sentence justification lacked adequate reasoning.
Five consolidated cases challenging the nationwide Order 904 remain pending in the Fifth Circuit. PJM initially proposed a phased approach with some generators losing compensation before others, but FERC rejected the transition period and directed a second compliance filing. PJM’s pending filing targets complete elimination by June 1, 2026. NYISO’s compliance filing sets its effective date at May 1, 2026.
Impact on Industrial Power Factor Economics
Industrial facilities operating below the 0.95 power factor threshold face a shifting landscape. While the order addresses generator-side compensation, the underlying economics of reactive power flow through the entire system. Facilities with poor power factor still face utility penalties ranging from $0.10 to $0.15 per excess kVAR or adjusted demand charges of $12 to $18 per kW. A medium-sized factory at 0.78 power factor pays roughly $20,000 annually in penalties. Power factor correction equipment with a typical payback of 12 to 24 months remains cost-effective regardless of upstream compensation changes.
Source: Mayer Brown, McGuireWoods
Critical Analysis
FERC Order 904’s 0.95 leading/0.95 lagging deadband directly maps to the reactive power range defined in IEEE 1459-2010 Clause 5 as the standard operating band for synchronous generators at the PCC. Removing reactive payment incentives across PJM by June 2026 reduces economic motivation for generators to maintain reactive capability margins.
5-Year Projection
Within 5 years, these regulatory frameworks surrounding Reactive Power Compensation will strictly govern hardware procurement, rendering non-compliant legacy systems obsolete.
Critical Perspective
PJM wholesale power costs jumped 54% to $67 billion. This change mirrors the California ISO’s decision to end reactive power payments in 2017, which did not significantly impact grid reliability. The 2003 Northeast Blackout, while complex, showed how system-wide voltage issues can cascade. Will this order truly simplify grid economics without creating new voltage support challenges?
