What is a Power Factor Penalty?

Connecticut and Pennsylvania charge customers for inefficient equipment, through a Power Factor Penalty. New Jersey is expected to implement a Power Factor Penalty over the next two years. This penalty is an additional charge billed by the utility company when the customer has a power factor less than some preset limit, typically between 90%-95%. This is called a power factor penalty since it is a penalty assessed on the customers electrical bill for lower than optimum power factor. The power factor penalty is an incentive for the customer to pay attention to the power factor at their operation and is commonly structured as an additional demand charge. If the normal demand charge was $5 per kW per month, the power factor penalty might add $2 additional per kW per month to the charge for a total of $7 per kW per month. This extra amount would be the penalty paid for low power factor.  more