This paper presents a marketing mechanism based on the Pay-As-Bid (PAB) method for reactive power ancillary services in the deregulated electricity market. Security, reliability and the location is major concern for Independent System Operator (ISO). So a modified Optimal Power Flow (OPF) optimization method is proposed in this paper to provide the system security. Firstly, the reactive power solution is obtained by solving a modified OPF model which maximizes system loadability subject to transmission security constraints imposed by thermal limits, voltage limits and stability limits. This modified OPF model is used for ensuring systemsecurity as well as for contingency analysis. Secondly, the Expected Payment Function (EPF) of generators is used to develop a bidding framework while Total Payment Function (TPF) based OPF is used to clear the PAB market. For the simulation and analysis purposes, a 24 bus RTS network is used in normal condition as well as in worst contingency state. The system security is preserved even in the worst contingency state.
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