Utility companies frequently charge power factor penalties to business with low power factor. What many don't realize is power factor as high as 90-95%, can still constitue a power factor penalty charge in some areas.

Why is this?
Many utility companies supply customers with volt-amperes (VA), but bill for watts (W). Power factor is the ratio between real power (kW) and apparent power (kVA).

Example:
Imagine a maintenance man having to pull a single roller coaster car on tracks to the repair shed. Since the repairman can't walk on the track, he pulls from an angle beside the track. The man is producing apparent power, however real power is what's required to move the car. Since the man is pulling at an angle, not all of his apparent power is being applied to moving the car forward. With the car on tracks, it won't move sideways toward the man, so what's called reactive power is wasted. The closer the man moves to the track (higher the power factor), the less power is wasted.

The same is true in facilities with multiple loads such as motors, computers and other various electronics. These loads reduce power factor within a facility and require higher amounts of apparent power. Higher apparent power requirements means higher utility bills for those billed per kVA/hour.

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