BILLDECODER GUIDE

What Is Power Factor on a Business Electricity Bill?

Power factor measures how efficiently your equipment uses electricity, on a scale from 0 to 1. Think of it like a glass of beer. The beer is useful power — the electricity that actually runs your equipment and does real work. The froth is wasted capacity — electricity your equipment draws but can't actually use. A low power factor means you're paying for froth.

If your business is on a kVA demand tariff, poor power factor directly inflates your demand charges. A power factor of 0.7 means 30% of what you're drawing from the grid is froth. You're being billed for the full glass — beer and froth together — but only the beer is doing anything useful. The good news: it can be fixed permanently with a capacitor bank, typically $3,000–$5,000 installed, with a payback of 10–18 months.

The beer and froth explanation

Electricity has two components that flow through your wiring. The first is real power, measured in kilowatts (kW) — this is the beer. It's the electricity that actually makes your motor spin, your oven heat up, and your lights turn on. It does useful work.

The second is reactive power, measured in kilovolt-amperes reactive (kVAr) — this is the froth. It's drawn by equipment with motors, compressors, and coils (things like air conditioners, refrigeration, and industrial motors). These devices need reactive power to create magnetic fields, but it doesn't do any useful work. It flows back and forth between the grid and your equipment without producing anything.

The full glass — beer plus froth — is called apparent power, measured in kilovolt-amperes (kVA). If your demand charges are billed in kVA (which many business tariffs are), you're paying for the full glass. Your power factor is the ratio of beer to the full glass. A power factor of 1.0 means your glass is all beer, no froth. A power factor of 0.7 means 30% of your glass is froth — and you're paying for all of it.

How does power factor affect my bill?

If you're on a kVA demand tariff — which many Australian businesses are — poor power factor inflates your kVA reading and therefore your demand charges. Here's a concrete example:

Imagine your equipment actually needs 50 kW of real power. With a power factor of 0.95, your apparent power (the number you're billed on) is about 53 kVA — barely more than the real power. But with a power factor of 0.7, your apparent power jumps to 71 kVA. You're being billed for 71 kVA when you only need 50 kW of useful power. That's a 34% premium on your demand charges, every single billing period, because of froth.

For a business paying $15/kVA/month in demand charges, that's the difference between $795/month and $1,071/month — an extra $276/month, or $3,312/year, just because of poor power factor.

What causes poor power factor?

Any equipment that uses a motor or creates a magnetic field draws reactive power. The most common culprits in Australian businesses are:

Air conditioning and refrigeration. These are the biggest contributors for most businesses. Compressor motors draw significant reactive power, and in a café or restaurant with multiple cool rooms and split systems, the cumulative effect is substantial.

Industrial motors. Workshops, manufacturing, and warehouses with conveyor belts, pumps, or compressors often have poor power factor due to the number of induction motors running.

Older fluorescent lighting. Magnetic ballasts in older fluorescent lights draw reactive power. LED upgrades eliminate this entirely.

Lightly loaded motors. A motor running well below its rated capacity draws proportionally more reactive power. If you have equipment that's oversized for the job, it's contributing to poor power factor.

How do I fix poor power factor?

The standard fix is a capacitor bank — a piece of electrical equipment installed at your switchboard by a licensed electrician. It generates reactive power locally, so your business no longer draws it from the grid. The froth is produced on-site instead of being pulled through the network.

Cost: $3,000–$5,000 installed for a typical SME. Larger businesses with higher demand may pay $5,000–$15,000.

Payback: Typically 10–18 months. Once installed, it reduces your demand charges immediately and permanently. There are no ongoing costs — a well-specified capacitor bank lasts 15–20 years.

Step 1: Get an electrician to measure your current power factor with a power quality meter. This takes about 30 minutes and many electricians will do it as part of a general assessment.

Step 2: If your power factor is below 0.9, get a quote for a capacitor bank sized to bring it above 0.95. Your electrician should be able to estimate the demand charge savings so you can calculate the payback period.

How do I check my power factor?

Some electricity bills show a power factor reading or list both kW and kVA demand figures. If your bill shows both, you can calculate power factor yourself: divide the kW figure by the kVA figure. For example, if your bill shows 50 kW and 65 kVA, your power factor is 50 ÷ 65 = 0.77 — which is poor.

If your bill doesn't show these figures, upload it to BillDecoder — we'll identify any power factor data that's present. Otherwise, any licensed electrician can measure it on-site in about 30 minutes with a power quality meter.

Frequently asked questions

Last updated: March 2026