Home / Top News / Power Factor, Demand Charges and What the Electric Companies Don’t Want You To Know [COMMENTARY]

Power Factor, Demand Charges and What the Electric Companies Don’t Want You To Know [COMMENTARY]

Power Factor, Demand Charges and What the Electric Companies Don’t Want You To Know


[COMMENTARY] As a business owner, do you know how to read your electric bill? Do you know that up to 40% of your monthly electric bill can be for charges not related to your ACTUAL USE OF ELECTRICITY? Do you know what a Demand Charge is? Are you aware that you can permanently reduce demand charges? Are you aware that the utility and power companies make a small fortune from these charges and have a very strong interest in keeping this information from the public? All of this is true and happens in virtually every public electric utility in the U.S.

In the interest of full disclosure, I represent Public Energy Advisers (www.publicenergyadvisers.com). We have a vested interest in selling our patented energy management systems, with a guaranteed to reduce utility demand charges.

This article contains anecdotal events with executives at some of the nation’s largest utilities.

These and other facts are what the utilities don’t want you to know. Despite deregulation, most utilities enjoy monopoly status and their executives operate with arrogance and impunity because business-owners are generally kept in the dark about options for energy management.


PSEG buries the explanation of Demand Charge as "Other" on customer bills

PSEG buries the explanation of Demand Charge as “Other” on customer bills

The largest portion of a commercial energy bill that in not directly related to how much energy you use is called a Demand Charge. A demand charge is the fee utilities charge its commercial customers to deliver them electricity, sometimes above and beyond what is referred to as a Delivery Charge. Typically, the Demand Charge is the highest (peak) kilowatt Hour(Kwh) usage by a customer during a 15-minute period over the billing month. That peak Kwh reading is used to bill the customer for an entire month…or more. So for example, if your company starts its day at 8:00a.m. each morning by turning-on all the machines at the start of the shift, which will cause your demand to spike for a very short period of time (motors require more energy at start-up than during normal operation).

Recently, PSEG was accused of unfairly classifying small businesses as large industrial customers; thereby increasing the base amount they could legally be charged. But the regulators allowed them to do this so they told those customers to basically get lost.

About 60% of electrical load today is comprised of motors. Motors, along with transformers and lighting ballasts, use electromagnetic fields to operate. That small spike in demand establishes your charge for the entire month. So even though your company may only use the higher number for a few minutes each month, you get billed as if you were using that higher amount all month.



A measurement standard of energy efficiency within commercial businesses is known as Power Factor. Power factor is a ratio of the amount of real power to apparent power, and represents how much real power electrical equipment utilizes. Power factor only exists in AC circuits, not Direct Current (DC). Think of a mug of beer. The volume of the mug represents apparent power, the beer in the mug is real power and the foam is the inefficient part. So you get charged for the full price, regardless of how much foam; and, you get penalized for having foam…which you are not sure how to control.

Using a formula, Power Factor is measured between 0 and 1. In the case of PG&E in California, companies with Power Factor below .90 are penalized by inefficiency fees as well. A PG&E Power Factor white paper explains this.

When we presented PG&E and to a different degree PSEG with a method of increasing Power Factor, they disparaged the entire notion of Power Factor as an illegitimate benchmark, despite using it themselves to justify demand charges to its customers. It is the ultimate expression of deception and proof that the utilities are exploiting commercial customers.


Demand charges are a legacy notion and were justified because some customers require rather large amounts of power for short periods of time. This high, short term power use requires larger transformers, power lines, and generating capacity to meet these infrequent peak needs. Demand rates were designed to allocate the costs of building and maintaining the electrical system for the peak periods to serve the customers who require that capacity.

As anyone in California knows, the utilities respond not by increasing capacity, but by initiating rolling black-outs. When was the last time the utility came to upgrade your equipment? This charge is antiquated and the utilities spent little if any of this money on increasing capacity, the notion has become an inside joke within the industry. The utilities collect billions of dollars from its commercial customers and provide little in the way of upgrades…it’s really free money.


There are a number of ways the demand or peak power is determined. As described above, the most common method is to measure the highest average power use in kilowatts during a 15 or 30 minute period each month. This peak power or peak demand is multiplied times the unit charge, usually in dollars per kilowatt to determine the demand charge listed on the bill. The demand charge is added to the customer charge, energy charge, and fuel cost adjustment, and any taxes to arrive at the total bill.

Demand rates are also financial incentives for commercial and industrial customers to pay attention to their power use patterns. Some demand rates are based on the highest demand for power measured the previous 12 months, called a ratchet. When was the last time the utility gave you a tip on how to reduce your demand charges? If you are like most businesses, the answer to that is NEVER.

There are new devices and technologies that can reduce Demand Charges significantly, but utilities outright refuse to introduce them to commercial customers because it is free money to the utilities.

Despite recent successes using dynamic capacitors to significantly reduce demand charges, no U.S. utilities provide rebates or programs to assist companies in deploying such products, even though they are proven to reduce demand spikes that lead to these high demand charges. In particular, utilities such as PSEG, PG&E and Silicon Valley Power have ignored verifiable proof from companies that reduce demand charges by increasing Power Factor. The reason for this is clear, it is a very lucrative source of revenue for the utilities that have near zero expense attached to them.


PSEG and Lockheed Martin basically present a front of pretending to help their customers achieve energy efficiency. I am referring to the commercial energy efficiency program offered by PSEG and overseen by Lockheed Martin. Most utilities have a similar program of make-belive programs to help customers.

When we initially presented our energy abatement products to PSEG they immediately scheduled a presentation to be attended by top-level officials from Lockheed Martin and PSEG. But once they learned that our products reduced demand charges, all the executives from PSEG and Lockheed began to disappear and then the communication ended abruptly. Shocking right? We have encountered the same behavior from executives at PG&E and Silicon Valley Power in California.

We don’t need the utilities to be successful. We did reach out to them because they do a lot of lobbying and run very expensive commercials claiming to help their customers save money and save energy. That is a fantasy. They are interested in the appearance of helping customers, not actually helping. What the utilities promote are rebates for efficient lighting, and that is a good thing, but across the board those rebate programs are disappearing. The cost of producing energy is plummeting and their rates are rising…you tell me who is trying to exploit the public.

Natural Gas prices have plummeted, yet PSEG is asking for increases in rates

Natural Gas prices have plummeted, yet PSEG is asking for increases in rates

We can prove monthly savings to customers that use our products, and we guarantee it. If the utilities are really interested in helping their customers, why are they ignoring the proof…and our guarantees?

Timothy Kelly
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Timothy Kelly

Tim Kelly is the Founder of ForexTV. Since its inception in 2003, ForexTV has been a global leader in forex news and has expanded its news coverage to multiple industries. ForexTV is now one of the most recognized brands in global financial news. Mr. Kelly was also the creator and co-founder of 401kTV where he served as Managing Editor until April 2017.

Mr. Kelly is an expert in online marketing, search engine optimization, content development and content distribution. He has consulted some of the top brokerages, media companies and financial exchanges on online marketing and content management including: The New York Board of Trade, Chicago Board Options Exchange, International Business Times, Briefing.com, Bloomberg and Bridge Information Systems and 401kTV.

He continues to be a regular market analyst and writer for ForexTV.com. He holds a Series 3 and Series 34 CFTC registration and formerly was a Commodities Trading Advisor (CTA). Tim is also an expert and specialist in Ichimoku technical analysis. He was also a licensed Property & Casualty; Life, Accident & Health Insurance Producer in New York State.

In addition to writing about the financial markets, Mr. Kelly writes extensively about online marketing and content marketing.

Mr. Kelly attended Boston College where he studied English Literature and Economics, and also attended the University of Siena, Italy where he studied studio art.

Mr. Kelly has been a decades-long community volunteer in his hometown of Long Island where he established the community assistance foundation, Kelly's Heroes. He has also been a coach of Youth Lacrosse for over 10 years. Prior to volunteering in youth sports, Mr. Kelly was involved in the Inner City Scholarship program administered by the Archdiocese of New York.

Before creating ForexTV, Mr, Kelly was Sr. VP Global Marketing for Bridge Information Systems, the world’s second largest financial market data vendor. Prior to Bridge, Mr. Kelly was a team leader of Media at Bloomberg Financial Markets, where he created Bloomberg Personal Magazine with an initial circulation of over 7 million copies monthly.
Timothy Kelly
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