Introduction

Massachusetts manufacturers have a number of opportunities available to them to reduce the cost of
electricity. These include financial incentives to implement energy efficiency measures and install
renewable energy technologies; facilities also have the ability to reduce overall monthly demand charges.
OTA is providing this fact sheet to help manufacturers better understand their electric bill so they can
save money by reducing demand charges and improving operating efficiencies in their use of electricity.
Demand Charges
While businesses can realize cost savings through traditional energy efficiency measures, additional cost
reductions can be achieved by lowering monthly demand charges. Every electric bill that your facility
receives includes charges for both electricity use and electric demand. Electricity use is measured in
kilowatt-hours (kWh), and reflects the consumption of electricity over a given period of timetypically a
month. Demand charges are based on the peak demand (maximum rate of electricity consumption in
kilowatts (kW)) at your facility each month over a specific time interval, typically 15, 30 or 60 minutes.
The higher the peak consumption over the demand interval, the more you will pay in electric demand
charges on your bill. The specific time interval and definition for the electric demand that is used in
calculating the demand charge on your monthly bills is found in your electric rate that can be obtained
from your utility's website. The electric rate typically appears on your monthly bill as a code with the title
of the rate (for example Time of Use G-3). The unit demand charge, defined as dollars per kilowatt
($/kW), is usually shown on your monthly bill, and is documented in your electric rate. Peaks in demand
can be caused by large current draws, such as the starting of large motors, turning on induction furnaces
or the use of compressors or ovens. To help you to better understand your electricity use and to control
demand, it is suggested that you analyze your daily load profile to learn how electricity is used within
your operations over time (see Figure 1). This will allow you to identify ways to reduce demand. Some
suggestions for reducing electric demand include:
Extend or stagger the time when your equipment is started up to minimize the peak usage over
the time interval on which your demand is based.
Use soft starters on your larger motors to reduce current draw during start-up. Another benefit to
evaluating your load profile is the ability to identify and reduce wasted electricity use (e.g., if
electricity is being used at times or days when its not needed).
Power Factor
The power factor at your facility may be considered by your electricity provider in determining the
demand, for billing purposes, that is used in calculating your monthly demand charge. This can have a
significant impact on your total demand charges and your monthly electricity bill! While your power
factor may vary over time, generally speaking, a high power factor indicates effective utilization of
electrical power, while a low power factor indicates poor utilization. Power factor is expressed as the ratio
of kW to kVA (kilovolt-amperes) delivered by your electric provider. Low power factor is caused by
inductive loads, such as transformers, high-intensity discharge lighting, and electric motors operated at
less than full load (which often occurs in cycle processes such as conveyors, compressors, and HVAC
fans). The electric providers in Massachusetts typically require a power factor of 90% or above, which
means that the ratio of kW/kVA should be > 90%. The effect of having a power factor below the
minimum stipulated by your provider will be that you will pay more in demand charges than you would if
the power factor was above the required minimum. This extra amount is charged by a utility so they can
recover their costs for maintaining a good power factor on their distribution system. While the monthly
facility power factor is usually not specifically shown on your bill, it is likely that power factor is
considered in determining your demand if you see both peak kW and peak kVA stated on your bill. You
can confirm whether your provider considers power factor in determining the monthly demand (kW)
charge and, if so, what their minimum required power factor is, by consulting the definition of demand
charges in your electric rate, or contacting your provider. Please keep in mind, however, that if your
power factor is already above the minimum level required by your provider, increasing it further will not
reduce your demand charges. Also, it is not necessary to correct your power factor if it is not considered

by your electricity provider in determining your demand charges. Additional information on power factor
is provided in DOEs tip sheet Reducing Power Factor Cost http://www1.eere.energy.gov/manufacturing/tech_deployment/pdfs/mc60405.pdf Technical Assistance
Options Improving load management and power factor, if necessary, can help you reduce your demand
charges and, therefore, your total electric costs. OTA is available to evaluate your electric bills to assess
the magnitude of your demand charges, and determine whether you are being penalized for a low power
factor.

http://www.mass.gov/eea/docs/eea/ota/fact-sheets/elec-bill-fact-sheet-final.pdf

Power Factor and Demand Charge Penalties

July 24, 2013

We've found that many people struggle to understand how Power Factor (PF) impacts demand
charges. Frequently, end use customers pay a significant premium each month in demand
charges because their PF is below a threshold set by the utility in the rate tariff. Oftentimes its
not obvious to the untrained eye when there are extra charges associated with a bad PF on the
customer bill. In this blog post, we are going to walk through PF and hopefully make it more
understandable to the average commercial and industrial consumer.

First, what is PF? We've heard all kinds of analogies that sort of make sense (e.g., head on the
beer, raised wheelbarrow, etc.), but most people just sort of accept that PF exists and over
thinking it is just too much work. PF is a dimensionless number, often expressed as a percentage,
that reflects the relationship between kilowatts (kW) and kilovolt-amperes (kVA). A PF of one
(sometimes referred to as unity) reflects a perfect PF where kW and kVA are equal. Many people
find it helpful to disaggregate kW and kVA into their building block components to better
understand them. We've done this below.
k = abbreviation for 1,000. 1 kW = 1,000 Watts
1 Watt = 1 Joule / sec. - (this is a measure of work done, referred to as Real Power)
A = Ampere - (1 Coloumbe per second, this is a measure of electric current)
V = Volt - (difference in electric potential across a wire found by A * where is resistance in ohms)
Volt-Ampere (VA) = Apparent Power - (This is the total power supplied to the circuit. It's found by
multiplying together the Root Mean Squares (RMS) of the voltage and the current. Since AC power is

sinusoidal, it can also be found with this equation, VA = (Vpeak/2) * (Ipeak/2), but the best way to explain
this concept is visually.

On AC systems, both the current and voltage are sinusoidal. If loads are reactive, then voltage
and current will be out of phase and the Apparent Power (S) will need to be greater to
accomplish the same work (in Watts) as a non-reactive load. The graphic above shows this
clearly. The hypotenuse shows the total Apparent Power (S) given a certain combination of real
(P) and reactive power (Q). The bottom side of the triangle shows the amount of power (P)
available to do Work which decreases as reactive power (Q) increases. If Q was zero, then S and
P in the triangle would be equal to each other and the PF would be 1. The cosine of the interior
angle in this triangle will give you the PF since the cosine of an angle is equal to the length of the
adjacent side divided by the hypotenuse (remember SOH, CAH, TOA from high school
geometry?). To put this triangle in real world terms, think of a reactive load like an old heavyduty electric motor that is just starting up. The motor will dissipate a lot of energy as heat while
getting up to speed and the energy dissipated as heat won't result in actual Work (in Watts). This
energy lost as heat represents the reactive power (Q). The real power (P) is the kinetic energy
that the motor is able to impart to do Work. The apparent power (S) is the total power that must
be delivered and is determined based on the amount of the useful real power (P) and the reactive
power (Q) that is lost as heat.

We've found that the water analogy is often a good way to explain electricity concepts to nontechnical people. In thinking about reactive loads, the water wheel is probably the best
illustration of the concept. Like an old heavy-duty motor, a water wheel requires a lot of energy
to get going but once its moving at the same speed as the current it requires much less energy to
maintain. Customer commonly ask what they can do about reactive loads and associated demand
charge penalties. The answer is "it depends", but it could involve any of the following: replace
the offending equipment with more modern equipment; institute behavioral changes so reactive
loads are used during off-peak hours; or install capacitors. Some utilities will even help subsidize
the cost of capacitors for customers with very reactive loads. The graphic below explains a bit
more about inductors and capacitors.

Excerpt from a CL&P bill for a large commercial customer

Now that we've fully explained PF and reactive loads, its time to talk about money and why we
should care about this stuff. There are many utilities out there that charge commercial and
industrial customers a penalty for having a poor PF. Anytime you see demand charges billed in
units of kVA, you should know that PF is baked into the demand charge and any drop in PF
below 1 results in additional billed units of demand. The graphic to the right shows a bill from
Connecticut Light and Power (CL&P). In the CL&P service territory, demand is billed in kVA
for large commercial and industrial customers.
Some utilities are more subtle in how they penalize customers for a poor PF. NStar's Boston
Edison tariff is a great example of this. The excerpt from the tariff for the B7
commercial/industrial rate shown below illustrates how this rate charges customers the greater of
their demand in kW or 90% of their kVA demand. In essence, this results in additional demand
charges for all customers with a PF of less than 90%. A customer with a PF of 85% and a peak
demand of (850 kW / 1,000 kVA) would pay for 900 kVA of demand, or 50 extra units of
demand relative to a customer with a PF of 90% or better. For customers in areas where demand
charges are high, extra units of billed demand can result in significant costs. The good thing is that most
utilities draw the line around 90% PF so to make excess charges due to poor PF go away, you don't have to be
perfect, just better than 90%.

Excerpt from the NStar B7 rate tariff

West Penn Power (a First Energy Company) provides another example of how utilities bill
customers for low PF. The excerpts from the tariff below show that the utility charges for units
of reactive demand which are measured in kVars. Charges for kVars don't kick in until the
measured reactive demand exceeds 35% of the kW demand. Excess reactive demand, in kVars,
is charged to the customer at a rate of $0.40/kVar for all kVars greater than 35% of the kW
demand. This type of billing structure is hard to follow, but customers with a good PF typically
won't have reactive demands high enough to trigger these charges. Its a bit more convoluted than
the NStar example shown above, but has the same effect of charging a penalty to customers with
low PFs.

Excerpt from the West Penn Power rate tariff for Schedule 30
This stuff can be complicated, if you are struggling to understand a PF billing issue, call us. We
can probably help.

http://energytariffexperts.com/blog/2013/7/18/power-factor-and-demand-charge-penalties