I joined the energy industry 11 years ago this week, the time has flown by and a lot has changed since 2007. Technology has been the driving force and is currently revolutionising the energy market. While the fundamental mechanics remain similar, the way in which pricing is determined for end users (customer) has evolved rapidly and the future only suggests more change with Solar and other distributed generation becoming more cost-effective, battery storage, electric vehicles, blockchain peer to peer energy trading through to the potential of multiple retailers supplying energy to a single ICP connection.

The Mysterious Case of the Power Factor

Power Factor remains somewhat like a dark art in the industry, it’s a small charge often hidden on one line of your power bill, there is no graphical data on the bill that tells you about it and it often sneaks past the accounts payable or finance team as they just see the whole invoice cost and when it is due. Energy Retailers typically know very little about it if questioned, the common line is that “it’s a pass-through charge that we don’t control, you need to talk to your network.” Which is usually met with, “you need to talk to your energy retailer” from the network.

For the basics on power factor, my article What is Power Factor is recommended reading.

Power Factor Pricing

Some distribution companies (local area electricity network owners), mostly in the North Island, have been charging large commercial and industrial customers reactive energy charges for some time. These networks have typically centred around the central North Island, Hawkes Bay, Bay of Plenty, Waikato and Auckland. While the networks do apply this charge differently, typically it averages out to be $7 per reactive kilo-volt amp per month ($7/kVAr/mth). In addition to this, some networks charge a peak kVA demand charge as well and if power factor is low during peak demand intervals customers are hit with a double whammy as a poor power factor inflates the kVA reading.

In the last couple of years, there has been quite a bit of discussion within the market from distribution companies about the way in which they price and how they will maintain large network infrastructure in a distributed generation environment. For the most part, the bulk of all electricity customers pay a cents per kWh charge to distribution companies as a way for them to recoup the cost of maintaining the network. This pricing structure is simple, which meets the requirements of residential and small business customers as it is easy to invoice and easy to understand. However, this way of charging was designed before smart metering, before the digital revolution even. The smart meter rollout across the country is by and large complete, which opens the door to time of use pricing in order to try and drive better usage behaviour from customers.

Benefits of Demand-Based Pricing

While time of use capacity and demand-based pricing has been a staple of some distribution companies for large commercial and industrial customers, it is likely that we will see this type of pricing extend to medium and small commercial customers in the future. This type of charging will assist the network operators to ensure the security of supply as more customers install solar panels and batteries throughout the grid, reducing the amount of volume (and revenue generated from variable usage charges) being transmitted throughout local area electricity networks.

We are already seeing this happen as PowerCo Western (New Plymouth) has introduced a nominal power factor charge for small/medium time of use metered customers in the last couple of years. This mirrors the way in which Vector (Auckland) re-introduced power factor charging in 2010, pricing was gradually increased over a period of 3 years allowing time for customers to see the power factor charges appearing on their invoices and make steps to rectify the issue. WEL Networks (Hamilton) recently introduced nominated capacity charges for low voltage customers where customers are required to set their expected capacity requirements, like the gas industry’s maximum daily quantity, if the customer demand exceeds the nominated capacity then expensive excess demand charges apply. WEL also recently changed from charging peak kW demand to peak kVA demand, further underlining to customers that they need to keep tabs on their power factor or face paying more on the monthly power bill than they need to.

Power Factor Doesn’t Have to be Mysterious

In large measure, power factor is a relatively simple fix if you know who to talk to about it. It can be one of those easy savings made without having to change behaviours, train staff or make a structural change to the way in which you do business. There are other benefits too, such as increasing the effectiveness of energy requirements and negating the need to upgrade supply if you are short on capacity. It can also improve the lifespan of sensitive computer-controlled equipment and improve harmonics. While it can seem like a bit of wizardry is required to rectify power factor issues, those in the know don’t need a magic wand, it’s pure science.