Reactive power is generated when AC voltage and current are phase-shifted by 90°, resulting in alternating positive and negative power that averages to zero over a full cycle. Reactive power compensation involves balancing reactive loads with capacitive loads to prevent the transmission of reactive power through the grid. This compensation is essential as it reduces reactive current, which causes heating in transmission lines and leads to energy losses. The discussion highlights the importance of understanding reactive power for engineers, particularly those transitioning from other fields, such as communication engineering, to power distribution. A solid grasp of concepts like VAR compensation is crucial for effectively managing low-voltage grids.