What Is a Power Factor Charge on a Commercial Electric Bill?
A power factor charge penalizes a business for drawing power inefficiently — usually because of motors, transformers, or other equipment that relies on magnetic fields to run — even when the total energy used (kWh) looks completely normal. It's a separate line item from both the usage charge and the demand charge, and it's one that many business owners have never noticed until it's pointed out.
What power factor actually measures
Power factor describes how efficiently electrical current is being converted into useful work, on a scale up to 1.0 (or 100%). Inductive loads — equipment that relies on the magnetic properties of electricity, like large motors, transformers, pumps, and older fluorescent lighting ballasts — disrupt the smooth waveform of alternating current, causing the current to lag behind the voltage. That lag means the utility has to deliver more total current than actually turns into usable work at your facility, even though your meter shows the same kWh of energy consumed. Purely resistive equipment, like incandescent lighting or electric heating elements, doesn't cause this problem.
Why utilities charge for it
Serving a customer with poor power factor costs a utility more even when the billed kWh is identical to a customer with good power factor, because the utility's wires, transformers, and generating capacity all have to be sized for the higher total current, not just the useful portion of it. Utilities recover that extra cost either through a direct power factor penalty line item or by adjusting the demand charge upward for accounts with low power factor. Many utilities consider power factor above roughly 0.90 to 0.95 acceptable and only charge a penalty below that threshold, though the exact cutoff, measurement method, and penalty structure vary by utility and rate class.
What usually causes it
- Large motors — HVAC compressors, pumps, industrial equipment — especially older or oversized ones running well below full load.
- Transformers, particularly ones that are lightly loaded relative to their rated capacity.
- Older fluorescent lighting with magnetic (rather than electronic) ballasts.
- A facility with a lot of this kind of equipment running simultaneously, which compounds the effect.
How to fix it
The standard fix is power factor correction: installing capacitors that supply reactive power locally, either on the main electrical service or directly on individual pieces of inductive equipment like large motors, so the utility no longer has to deliver that extra current across its own system. These projects are common enough that many electrical contractors offer them specifically, and because the fix directly removes a penalty charge that recurs every billing period, the payback period is often just a few years — sometimes faster on a facility with a lot of older motor equipment.
Frequently asked questions
What causes a low power factor?
Inductive loads — equipment that relies on magnetic fields to operate, like large motors, transformers, and older fluorescent lighting ballasts — are the usual cause. Purely resistive loads, like incandescent lighting or electric heating elements, don't cause power factor problems.
What's considered a good power factor?
Power factor is measured on a scale up to 1.0 (or 100%), representing perfectly efficient power draw. Many utilities consider anything above roughly 0.90–0.95 acceptable and only apply a penalty below that threshold, though the exact cutoff and penalty structure vary by utility and rate class.
How do businesses fix a low power factor?
The standard fix is installing power factor correction capacitors, either on the main electrical service or directly on large inductive equipment like motors. These supply reactive power locally, reducing the burden on the utility's system, and often pay for themselves within a few years through avoided penalty charges.
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