A company in Tennessee installed capacitors last year for $5,300, which eliminated more than $18,000 in annual charges for reactive power. The payback on this investment was about four months. There might be a similar opportunity at your facility; you just need to know what to look for.

At issue for the facility were charges related to reactive power. Some companies pay far too much for this type of power. Costs can vary widely and are often not clearly described on the invoice. Even the concept of reactive power is often not clearly understood.

In Part 1 of this series on energy (March 2009 Baking & Snack), reactive power was briefly discussed, but this article will dive deeper into information to help you discern whether you can find energy and cost savings in this area. Within this concept, we will also help you understand the basics of reactive power and make good investment decisions related to power factor correction.


The two basic types of electric power are real (measured in kilowatts [kW]) and reactive (measured in kilovolt-ampere [kVAR]). Most electric bills have charges based on real power [kW] and energy usage [kwh]. Real power turns the motor shaft and provides torque, heat and light. Generating real power requires an energy source such as a wind turbine, water wheel, steam turbine or combustion engine.

In addition to real power, loads such as motors require reactive power [kVAR] to create and maintain magnetic fields so the motor can work. Transformers, light ballasts and other common types of electric equipment also need reactive power. Essentially, you can either generate your own reactive power or buy it from your utility. You might even be buying it now without knowing it, and that can cost you. The most common way to generate reactive power is by installing a bank of capacitors. The key decision to be made is determining which method is most cost effective for a facility — to generate or to buy. To make that determination, you will first need to understand a few basics.


Determining your reactive demand can be simple or difficult depending on how your energy supplier bills for the energy your facility consumes. This varies widely by utility or energy supplier. Two utilities that use similar methods may even reveal different levels and kinds of information on the actual energy invoice. In general, you need to understand how your utility company is arriving at its calculation for how much reactive power your facility requires. One key item to look for is the units on your energy invoice. Some energy bills are based on “apparent power,” and that is measured in kVA. Real [kW] and reactive [kVAR] power can be used to compute “apparent” power [kVA], using the Pythagorean Theorem (a2 + b2 = c2 ). Typically, a close reading of your utility bill and/ or the tariff being used to calculate your bill will help you determine which type of power is being used to determine your energy charges.

It is important to understand your requirement for each type of power and how charges are determined. Even though you may not see a line item on your bill for “reactive power,” you are most likely being charged for it. In some cases, it will be labeled as a “power factor correction” charge. Your facility’s power factor is simply the ratio of real to apparent power and is typically given as a percentage.

Power factor = real power [kW] / apparent power [kVA]

Pull a recent electric invoice from your files and have someone draw the power triangle for that billing period. Use that to get your arms around your reactive demand and/ or power factor correction charges. If you need help, someone at your utility may be able to assist you. This will help you determine how much real and reactive power your facility requires. Power factor is usually between 75% and 98%.

The question that comes next is how much would you save if your power factor was higher? The answer might be “nothing,” or the potential savings may be significant. To help you zero in on the economics, you will need to understand how reactive power is priced and sold.


Reactive power can be priced and sold by a variety of methods. The most common ways are a fee based on kVAR demand each month; kW demand adder or multiplier based on power factor; and demand based on kVA.

The price of reactive power can range from no charge to more than $200 per kVAR per month. The highest charges usually result from demand based on kVA.

While this article describes the common methods to charge for reactive power, other methods exist. Your electric supplier should be able to explain your charges.

kVAR Demand Fee. Some utilities have a fee based on kVAR demand each month. Consider one large utility in the Southeast that charges 21¢ per month per kVAR. On an annual basis, this is $2.52 per kVAR. The installed cost of a capacitor bank can vary from $25 to $100 per kVAR. In this case, a facility located in that part of the country should buy reactive power from the utility and not install a capacitor because the payback timeframe for such an investment would be more than 10 years. Typically, a capacitor investment starts to make sense if you have a kVAR demand charge of more than $1 per month per kVAR.

kW Demand Adder. In another area of the Southeast, a utility uses a kW demand adder to arrive at reactive power charges. If power factor falls below 90%, the billing demand is adjusted by the factor using the following formula: Billing demand adjustment factor = 0.90 divided by actual power factor.

This method can result in significant charges for reactive power. Consider the following example: A facility with actual demand of 7,873 kW, a power factor of 81% and a demand charge of $4.50 per kW. Because of the relatively low power factor, this customer will pay an extra $3,936 each month and should consider the installation of capacitors to increase power factor to 90%.

kVA Demand. Another example of how utilities charge for low power factor is based on kVA. Because the demand charge is based on apparent power [kVA], low power factor directly increases the demand charge.


If your electric invoice includes significant charges for reactive power (high power factor correction charges), you should consider the installation of a capacitor bank to eliminate these charges. Such an investment may or may not have an acceptable payback, as every site is different.

If you already have power factor correction capacitors, you should check to be sure they are working. Blown fuses and control failures are common and render the equipment ineffective.

You should also minimize your need for reactive power. Oversized and idling electric motors are a common cause of low power factor. Idle motors should be turned off, and oversized motors resized to meet the requirement.

The key is finding your facility’s ideal economic target for reactive power and power factor correction. No “one number” represents an ideal power factor. The ideal target for your facility must be considered in light of your utility’s rates, billing practices and your facility’s specific load requirements. Determine your reactive power requirements and associated charges on your electric bill. Not everyone will find treasure under this stone, but it’s worth evaluating to be sure you’re not missing a great investment opportunity with a short payback timeframe.

Both authors currently work for Summit Energy Services, Louisville, KY, a national energy management company. Mr. Stiller is the director of energy management, and Mr. Marmorato is a rates analyst, and is responsible for research and analysis of regulated natural gas and electric power markets.