Reactive power plays a prime role in power system operation. But contingencies due to reactive power shortages are rarely considered while evaluating the reliability of a system. This paper takes into account the failure of reactive power sources also while evaluating reliability of a system and calculates a separate set of reliability indices due to reactive power shortage. Demand Side Management (DSM)is a promising attempt in improving the system reliability. Here we consider the novel concept of including the effect of reactive power failures in DSM reliability studies. Reliability indices are evaluated for the modified IEEE 30 bus system and also for the same one where DSM is already in operation, which makes it a smart grid. We see that the reliability is improved in the latter case even on considering reactive power source failures also. © 2016 IEEE.