A high-power factor eliminates penalty amount imposed when operating with a low power factor. For many years, most utilities demanded a minimum of 85% power factor as an average for each monthly billing. Now many of these same utilities are demanding 95%…or else pay a penalty! The actual wording or formula in the utility rate contract might spell out the required power factor, or it might refer to KVA billing, or it might refer to KW demand billing with power factor adjustment multipliers. Have your utility representative explain the particular rate contract used in your monthly bill. This will insure you are taking the proper steps to obtain maximum savings by maintaining a proper power factor.
Additional Capacity in Electrical System
A high-power factor can help you utilize the full capacity of your electrical system. To refresh our memory, let’s look again at the power triangle story, shown on figures 1, 2. Remember that KVA is a measure of the total power generated by the utility for you to accomplish your KW of work.
Remember that the KVA figure is the amount of power passing through your plant transformer, and limited by its rated size: e.g. 750 KVA, 1500 KVA, 2500 KVA, etc. In the previous example, we reduced your transformer loading from 1160 to 913 KVA, thus allowing for more load to be added in the future.
Reduction of I^2 R Losses
A potential savings in billed KW-Hrs can be realized depending upon where the capacitors are located in your electrical system. When capacitors are energized they reduce the total power usage (KVA) from their location in the system up to the utility source. In other words, capacitors reduce the current in amperes that had been flowing from the utility to the capacitor location. This ampere reduction might be as high as 20%. Since watt loss generated by current passing through a conductor is expressed by the formula…
Ø Watt loss = (Ampere) 2 x Conductor Resistance (W=I2R)
It is obvious that locating the capacitors at the extremities of the feeders and branch circuits (where the loads are) can result in a sizeable reduction in total KW-Hrs usage every month.
Source: Power factor correction application guide