FERC Order 904 Kills Reactive Power Payments
- Power Factor Power Quality Regulatory
Marin Holt
- 0
- 8 minutes read
- FERC Order 904 eliminates reactive power payments for generators operating within 0.95 lagging to 0.95 leading PF band
- D.C. Circuit Court vacated FERC approval of immediate reactive power elimination in MISO territory
- Order affects over 1,000 generators nationwide that previously received reactive power compensation
- North America power factor correction market at 34M in 2025, projected 99M by 2030 as load-side burden grows
- FERC rulemaking shifts reactive power burden from generators to load-side automatic capacitor banks and STATCOMs
The Federal Energy Regulatory Commission eliminated all compensation for reactive power provided within the standard power factor range in October 2024. FERC Order 904 bars transmission providers from paying generators for maintaining voltage stability inside the 0.95 leading to 0.95 lagging deadband, a service the commission determined costs generators nothing to provide. The D.C. Circuit Court of Appeals vacated the rule’s immediate implementation in MISO territory in November 2025, ruling FERC failed to consider generators’ reliance interests.
What the Order Eliminates
Order 904 targets reactive power compensation, the payments generators receive for absorbing or injecting reactive power to maintain grid voltage within acceptable ranges. Before the order, PJM Interconnection, ISO New England, and the New York Independent System Operator paid generators for reactive power even within the standard operating deadband of 0.95 leading to 0.95 lagging power factor. California ISO and Southwest Power Pool had no reactive power compensation products.
FERC found that compensating generators for reactive power within this range is unjust and unreasonable. The commission reasoned that interconnection agreements already require generators to provide reactive power, and doing so within the standard range costs generators nothing or close to nothing. The order applies to all FERC-regulated regions with no grandfathering for existing reactive rate schedules.
Why This Matters
Reactive power keeps transmission voltage stable. Without it, voltage sags cause equipment malfunction and voltage spikes damage insulation. Every generator connected to the bulk power system provides reactive power as a basic interconnection obligation. The question Order 904 answers is whether generators deserve extra payment for meeting that obligation.
For industrial facilities paying power factor penalties on the distribution side, the FERC ruling establishes a parallel principle at the transmission level: maintaining power factor within the standard range is a baseline expectation, not a premium service. Utilities that charge industrial customers power factor penalties below 0.90 or 0.85 now operate under a framework where even generators receive nothing for staying within 0.95.
The Court Challenge
Capital Power Corporation and other generators challenged Order 904 in multiple courts. On November 17, 2025, the D.C. Circuit vacated FERC’s approval of MISO’s compliance tariff amendments, finding the commission “acted arbitrarily and capriciously by failing to fully consider the short-term reliance interests” of affected generators. The court did not strike down Order 904 itself but ruled FERC needed to consider whether a phase-in period was warranted for generators that had built revenue projections around reactive power payments.
Compliance filings were due January 27, 2025, with proposed effective dates of April 26, 2025. ISO-NE, NYISO, and PJM received permission to request later effective dates to develop necessary market rule changes. Substantive challenges to Order 904 remain pending in the Fifth Circuit, and FERC faces no deadline to act on the D.C. Circuit remand.
Implementation Outlook
The ruling reshapes the economics of reactive power across every U.S. wholesale electricity market. Generators that previously earned revenue from deadband reactive service lose that income stream. Independent power producers face the largest impact, as their reactive power schedules represented a steady, low-risk revenue component. The Fifth Circuit proceedings will determine whether Order 904 survives in its current form or requires modifications to address generator reliance interests nationwide, not just in MISO.
Source: Mayer Brown, McGuireWoods
Critical Analysis
FERC Order 904 defines the reactive power deadband at 0.95 leading to 0.95 lagging power factor, eliminating compensation for voltage support within this range across PJM, ISO-NE, and NYISO. Removing financial incentives for reactive power provision within the standard deadband may cause generators to prioritize active power dispatch over voltage support, reducing reactive headroom on weak transmission buses.
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
FERC Order 904 eliminates reactive power compensation within the 0.95 power factor deadband on the finding that generators incur zero cost providing this service, but generators representing over 40 GW of wind capacity submitted operational data during the rulemaking showing that reactive capability consumes real megawatt output through field winding losses — data FERC acknowledged but found insufficient to override its cost-of-service determination. The D.C. Circuit’s November 2025 vacatur in MISO mirrors what happened to FERC Order 745 in 2014, when the court found the commission had exceeded its jurisdiction over demand response compensation; that ruling took three years of remand proceedings to resolve and left market participants unable to plan investments across multiple RTOs. NERC’s 2024 Reliability Assessment flagged voltage support adequacy as an emerging concern in seven of nine interconnection regions, a finding that sits in direct tension with Order 904’s premise that reactive power inside the deadband is costless to provide. If the D.C. Circuit found FERC failed to consider reliance interests in MISO, what prevents the same challenge succeeding in PJM and SPP when those implementations proceed?
