Power factor is the ratio of real power (kW), which does useful work, to apparent power (kVA), which is everything the utility delivers. A power factor of 1.0 means every unit delivered does work. Many utilities penalize commercial customers below about 0.90, usually by raising billed demand rather than the energy charge. Check your last three bills for a kVA reading, a power factor adjustment, or a reactive charge.
There is a number on your utility bill that probably has not been checked since your building was commissioned. It is called power factor, and it can raise the demand you are billed for. With commercial electricity prices up, EIA's May 2026 outlook projects a U.S. commercial average of 13.98 cents per kWh for 2026, against 13.41 in 2025, so anything that inflates your bill costs more than it did a year ago.
Power factor works differently from the usual suspects. It barely moves your kWh, but it can trigger a separate reactive charge on top and leave you paying for bigger transformers and wiring than your equipment needs. Here is where to find it on your bill, and the number to watch.
Picture a pint glass. The beer is Real Power (kW), the useful work your equipment does, like running compressors, spinning fans, and lighting rooms. The foam is Reactive Power (kVAR), the magnetizing current that motors and transformers need to operate. It takes up room in the glass without quenching anything.
The whole glass is Apparent Power (kVA). This is what the utility has to deliver and what your wires must carry. Power factor is the share of the glass that is beer, or in mathematical terms, PF = kW ÷ kVA.
A power factor of 1.0 means a glass of pure beer. A power factor of 0.80 means a fifth of the glass is foam, and you are paying for capacity that does no work. The glass is a simplification, since kW and kVAR do not add up like liquids in a glass, but the idea holds.
Low power factor barely changes your kWh, so your equipment does the same work and uses nearly the same kWh either way. What changes is how you are billed. Your bill measures electricity in three ways:
Load factor ties kWh and kW together by comparing average demand to peak. Power factor adds the third layer. Many utilities do not stop at kW. They look at how much capacity they had to deliver to support that peak.
When your power factor is low, the same work draws more current. Your kVA climbs at the demand peak, and on tariffs that measure it, so does your billed demand.
There is one small energy effect. The extra current loses some energy as heat in your own conductors and transformers. It is real, but it is minor next to the demand and capacity cost, which is where the money goes.
Utilities recover the cost of low power factor in three common ways. Which one applies to you depends on your tariff, so the label on your bill matters more than the mechanism's name.
Some tariffs bill demand on kVA instead of kW, so a low power factor raises the demand line directly. Avista's Washington Schedule 25 is one such example, as seen in the rate calculation guide effective July 1, 2026, which bills demand in kVA.
Other tariffs scale billed kW up when power factor falls below a threshold. Austin Energy applies an adjustment below 90 percent, multiplying peak kW by 0.90 and dividing by the recorded power factor. Its own example turns 13.5 kW at a 0.87 power factor into 14.0 billed kW, about 4 percent more on the delivery, demand, and regulatory charges.
A third group adds a separate line for Reactive Power. Georgia Power's school service schedule (SCH-25, January 2025) bills $0.42 per kVAR of excess reactive demand, defined as kVAR above one-third of measured kW. For example, a 300 kW peak gets 100 kVAR free, so a facility drawing 160 kVAR pays for the extra 60 kVAR, or $25.20 for the month. Avista's Schedule 21 works similarly, charging $0.50 per excess reactive kVA once a customer with 50 kW or more of demand draws Reactive Power at its peak above 48 percent of its kW demand, which is a power factor of about 0.90.
On your own bill, look for any of these labels: PF adjustment, reactive demand, kVAR charge, or power factor penalty. Any of these means your tariff puts a price on power factor.
Take a hypothetical building with a 500 kW peak, compared at a 0.80 and a 0.95 power factor. The billing math follows the Avista and Austin Energy mechanisms above:
The building does identical work in both scenarios, yet it is billed for about 13 to 19 percent more demand at the lower power factor, depending on which mechanism your tariff uses.
As an illustration, recall Georgia Power's school service schedule. Under this tariff, a 500 kW peak gets about 167 kVAR free. At a 0.80 power factor you carry about 375 kVAR, so you pay for the extra 208 kVAR, amounting to roughly $87.50 per month. At 0.95, you carry about 164 kVAR, which is under the allowance, so the charge is zero.
For commercial facilities, a power factor of 0.95 or above is generally considered good, and utilities draw their lines close to this threshold. As mentioned above, Austin Energy starts adjusting billed demand below 0.90. Avista's reactive charge kicks in at about 0.90 as well, and Georgia Power's allowance works out to roughly 0.95. Anything below 0.90 deserves a closer look.
One reading will not tell you the whole story, because power factor moves with load. A building can look fine at 2 PM and poor at 6 AM, when motors run lightly loaded. A motor needs about the same magnetizing current whether it is working hard or barely working, so its power factor falls as the work drops.
The usual suspect for a low power factor is the induction motor, especially an oversized or lightly loaded one. A DOE Motor Challenge fact sheet traces low power factor to inductive loads and advises minimizing operation of idling or lightly loaded motors. In a commercial building, that points to fans, pumps, and compressors, along with transformers that run lightly loaded.
Nonlinear loads, including variable frequency drives (VFDs), LED drivers, and IT equipment, add harmonic distortion. That is why "true" power factor can differ from "displacement" power factor. Displacement power factor measures the phase shift between voltage and current, while true power factor also accounts for distortion. If harmonics are a concern in your building, a power quality study will tell you more than a single power factor number.
The right fix depends on your loads and your tariff.
Fixed capacitor banks suit steady motor loads. The U.S. Department of Energy's Motor Challenge fact sheet lists installing capacitors in the AC circuit as a way to decrease reactive power and avoid the penalty. For variable loads like HVAC, automatic correction with switched capacitor banks follows the load.
Where nonlinear loads drive the problem, harmonic filters may be needed. Capacitors in a high-harmonic building can make things worse through resonance, so size them with an engineer. Matching motor size to the actual load can also help: replace oversized motors with right-sized ones as they wear out, and check any equipment that runs mostly underloaded.
If your tariff does not bill power factor or kVA, and you are not near capacity limits, correction may not pay. If it does, the 500 kW example earlier shows what is at stake.
Whichever route you take, measure first. You cannot size a capacitor bank without knowing kVAR by load and time of day.
Your utility bill shows at most one monthly power factor number, if any. That number hides when the problem happens and which equipment causes it.
Circuit-level power quality monitoring fills the gap. It shows power factor and related power quality data (like voltage sag and swell, harmonics, and phase imbalance) by circuit and time of day, so you can see which equipment and which hours drive the problem. It also verifies that correction equipment works and catches capacitors that degrade over time.
The catch is that most buildings meter only the utility main. Extending the metering tree below it is what makes power factor visible by circuit, and E360 builds that tree out wirelessly. Monitoring reports. It does not correct power factor, but circuit-level data shows you where correction is worth paying for.
Pull your last three bills and look for a kVA reading next to your kW, a power factor adjustment, or a reactive charge. If you find any of these, you have a cost you can put a number on. If there are none, your tariff may not penalize power factor today, though oversized equipment still costs you capacity.
Either way, one monthly figure only tells you so much. Circuit-level metering shows when and where your power factor drops, which is granular enough to size correction equipment properly and to confirm that the correction equipment continues to work.
Power factor is the ratio of Real Power (kW) to Apparent Power (kVA). It tells you how much of what the utility delivers does work. A value of 1.0 is ideal.
Only very slightly, through extra heat loss in your own wiring. The real cost of low power factor is billed demand and the capacity you pay for but cannot use.
It is a charge or billing adjustment when your power factor falls below a utility's threshold. It takes the form of kVA-based demand, an adjustment to billed kW, or a reactive demand charge.
Generally 0.95 or above. Many utilities start penalizing below about 0.90, but thresholds vary by tariff.
Mainly inductive loads, especially oversized or lightly loaded motors, plus lightly loaded transformers. Nonlinear loads like VFDs, LED drivers, and IT equipment add harmonic distortion.
It depends entirely on your tariff. If your utility bills on kVA, adjusts billed kW, or charges for reactive demand, correction can pay. If it does not, the savings may be small.
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