The economics of improving power factor

A better understanding of power factor, harmonics, electrical distribution systems, and the utility’s billing practices will help reduce electric bills.

By Ed Kwiatkowski, BSEE, MS, Staco Energy Products Co November 2, 2010

A frequently asked question is “will correcting power factor really reduce my electric bill?” There is no simple answer to this question. A better understanding of power factor, harmonics, the specifics of a facility’s electrical distribution system, and the billing practices of the electrical utility or energy provider is required to properly answer that question.

Power factor

Electrical power in an AC circuit has three components: real power (P), reactive power (Q), and apparent power (S).

Real power is considered the work-producing power measured in watts (W) or kilowatts (kW). For example, real power produces the mechanical output of a motor.

Reactive power is not used to do work, but is needed to operate equipment and is measured in volt-amperes-reactive (VAR) or kilovar (kVAR). Many industrial loads are inductive such as motors, transformers, fluorescent lighting ballasts, power electronics, and induction furnaces. The current drawn by an inductive load consists of two components: magnetizing current and power producing current. The magnetizing current is required to sustain the electromagnetic field in a device and creates reactive power. An inductive load draws current that lags the voltage, in that the current follows the voltage wave form. The amount of lag is the electrical displacement (or phase) angle between the voltage and current.

In the absence of harmonics, apparent power (also known as demand power) is comprised of (vectorial sum) both real and reactive power and is measured in units of volt-amps (VA) or kilovolt-amps (kVA).

Power factor (PF) is the ratio of the real power to apparent power and represents how much real power electrical equipment uses. It is a measure of how effectively electrical power is being used. Power factor is also equal to the cosine of the phase angle between the voltage and current

Electrical loads demand more power than they consume. Induction motors convert at most 80% to 90% of the delivered power into useful work or electrical losses. The remaining power is used to establish an electromagnetic field in the motor. The field is alternately expanding and collapsing (once each cycle), so the power drawn into the field in one instant is returned to the electric supply system in the next instant. Therefore, the average power drawn by the field is zero, and reactive power does not register on a kilowatt-hour meter. The magnetizing current creates reactive power. Although it does no useful work, it circulates between the generator and the load and places a heavier drain on the power source as well as the transmission and distribution system.

As a means of compensation for the burden of supplying extra current, many utilities establish a power factor penalty in their rate schedule. A minimum power factor, usually 0.85 to 0.95, is established. When a customer’s power factor drops below the minimum value, the utility collects a low power factor revenue premium on the customer’s bill. Another way some utilities collect a low power factor premium is to charge for kVA (apparent power) rather than kW (real power). With a diverse range of billing rate structures imposed by electrical utilities especially for large users, it is imperative to fully understand the billing method employed.

Improving power factor

Adding capacitors is generally the most economical way to improve a facility’s power factor. While the current through an inductive load lags the voltage, current to a capacitor leads the voltage. Thus, capacitors serve as a leading reactive current generator to counter the lagging reactive current in a system.

The expression “release of capacity” means that as power factor of the system is improved, the total current flow will be reduced. This permits additional loads to be added and served by the existing system. In the event that equipment, such as transformers, cables, and generators, may be thermally overloaded, improving power factor may be the most economical way to reduce current and eliminate the overload condition.

Primarily, the cost-effectiveness of power factor correction depends on a utility’s power factor penalties. It is crucial to understand the utility’s rate structure to determine the return on investment to improve power factor.

Maintaining a high power factor in a facility will yield direct savings. In addition to reducing power factor penalties imposed by some utilities, there may be other economic factors that, when considered in whole, may lead to the addition of power factor correction capacitors that provide a justifiable return on investment. Other savings, such as decreased distribution losses, improved voltage reduction, and increased facility current carrying capacity, are less obvious. Though real, often these reductions yield little in cost savings and are relatively small in comparison to the savings to be gained from reducing power factor penalties.

Harmonic current considerations

This article intentionally assumes that a facility does not have significant harmonic currents present. However, some caution must be taken when applying capacitors in a circuit where harmonics are present (true power factor).

Although capacitors themselves do not generate harmonics, problems arise when capacitors for power factor correction improvement are applied to circuits with nonlinear loads that interject harmonic currents. Those capacitors may lower the resonant frequency of that circuit enough to create a resonant condition. Resonance is a special condition in which the inductive reactance is equal to the capacitive reactance. As resonance is approached, the magnitude of harmonic current in the system and capacitor becomes much larger than the harmonic current generated by the nonlinear load. The current may be high enough to blow capacitor fuses, create other “nuisance” problems, or develop into a catastrophic event. A solution to this problem is to detune the circuit by changing the point where the capacitors are connected to the circuit, changing the amount of applied capacitance, or installing passive filter reactors to a capacitor bank, which obviously increases its cost. Use of an active harmonic filter may be another solution.

Capacitor bank considerations and associated costs

The selection of the type of capacitor banks and their location has an impact on the cost of capacitor banks. More difficult than determining the total capacitance required is deciding where the capacitance should be located. There are several factors to consider, including:

  • Should one large capacitor bank be used, or is it better to add small capacitors at individual loads? 
  • Should fixed or automatically switched capacitors be employed? 

In general, since capacitors act as a kVAR generator, the most efficient place to install them is directly at an inductive load for which the power factor is being improved.

Fixed capacitor location schemes include:

  1. Combining the required amount of capacitors at the main bus will eliminate the power factor penalty but will not reduce the losses in the facility. Capacitors placed at this location are the most susceptible to harmonic resonance.
  2. Distributing the capacitors to the motor control centers and subpanels proportional to average load. This will generally improve losses, although it is not an optimal solution.
  3. Distributing the capacitors using the motor sizes and the NEMA tables as a guide. This solution does not reflect the need for more released capacity, if this is a goal. Capacitors sized for small loads are often proportionally much more expensive than larger fixed capacitors, primarily because of installation costs.

Capacitor switching options include:

  1. Switching a few of the capacitors with larger motors is an option. The capacitors may be physically installed either directly connected to the motor or through a contactor on the motor control center that is tied in with the motor control. If the motors are large enough to use capacitors of the same size as were being considered for the fixed capacitor scheme, little additional cost is incurred for installing them on the motors. Where the economy is lost is when the capacitors are placed on several small motors. There is relatively little difference in installation costs for large and small 480-V units.
  2. The second switching option is to consider an automatic power factor controller installed in the capacitor bank. This will switch large capacitor banks in small steps (25 through 50 is common) to follow the load. Automatic power factor capacitor banks should be installed at the motor control center rather than on the main bus, if optimal distribution loss is a goal. The economics of purchasing, installing, protecting, and controlling single large automatically switched capacitor banks can tilt the decision toward a main bus location, especially if the primary goal is to avoid power factor penalties.

Reactors can be added to fixed or automatic power factor capacitor banks to prevent the risk of the harmful effects of harmonics (detuned filters).


The question of “will correcting power factor really reduce my electric bill” is not an easy question to answer. However, raising power factor is a proven way of increasing the efficient use of electricity by utilities and end-users. The application of capacitors in the presence of harmonics must be done with care.

Economic benefits for end-users may include reduced energy bills, lower cable and transformer losses, and improved voltage conditions, while utilities benefit from released system capacity.

Capacitors are an effective, proven, and efficient means of improving power factor.

– Kwiatkowski is the president of Staco Energy Products Co. in Dayton, Ohio.