Arbitrage is a known economic term, implying simultaneous transaction on commodities. For instance, a Generation Company (GenCo) may involve itself in selling fuel, emission allowance and etc., instead of generating either active or reactive power. Moreover, arbitrage between active and reactive powers can, in turn, be considered.
In this paper, arbitrage between active and reactive power is considered from Independent System Operator (ISO) viewpoint. A pool model is employed. ISO runs an optimization problem, by which, it could determine and predict GenCos behaviours; in terms of participating in active and reactive power markets for the next twelve months. A normal distribution function is used for price forecasting. Two 3-bus and 14-bus test systems are used to demonstrate the capabilities of the proposed algorithm.