This thesis investigates the behaviour of marginal prices for reactive power in a competitive electricity spot market. In the proposed spot market, non-zero unit costs are assigned to the generation of reactive power as a method of paying for reactive power ancillary services. These costs enable reactive power to be optimally dispatched in the same manner as real power. This is unlike previous research, which has only described the behaviour of reactive power marginal prices in spot markets where the unit generation costs of reactive power equal zero.

The theory of Dispatch Based Pricing, proposed by Ring [1995] is used to calculate and describe the behaviour of reactive power marginal prices for this spot market. Dispatch Based Pricing is an ex post variant of spot pricing, with the rare ability to accept non-zero unit generation costs for reactive power. It was originally derived from an optimal power flow (OPF) formulation. A new classification system for power system nodes in any OPF formulation is defined to enable the behaviour of reactive power marginal prices to be clearly described. Hence, Dispatch Based Pricing is redefined with respect to this classification system. An OPF is developed to validate this redefined Dispatch Based Pricing model and the marginal prices generated thereby. This OPF accepts non-zero unit generation costs for both real and reactive power, and uses them to optimally dispatch real and reactive power generation.

The mechanisms determining the behaviour of reactive power marginal prices are investigated for optimal and sub-optimal dispatches of an unconstrained power system. Price behaviour is also investigated for optimal dispatches of voltage-constrained and reactive-power-generation-constrained power systems. The implications of this reactive power marginal price behaviour are discussed. It is shown that Dispatch Based Pricing can be used to calculate marginal prices when a load-following generator is used to supply reactive power.

The conclusions regarding the behaviour of reactive power marginal prices are used to propose a spot market with non-zero reactive power unit generation costs, for the South Island section of New Zealand's National Grid. The use of Dispatch Based Pricing to calculate reactive power marginal prices for this spot market is detailed. The effects of this spot market on the operation of this South Island power system are then discussed.