PG&E Power Factor & Demand Charges — Every Question Answered

Power factor measures how efficiently your facility uses the electricity PG&E delivers. When electricity flows into your building, two types of power flow simultaneously: real power (kW), which does actual work running motors and equipment, and reactive power (kVAR), which charges and discharges magnetic fields in motors and transformers but does no useful work. Power factor is the ratio of real power to total power delivered.

Think of it like a pint of beer — the liquid is real power, the foam is reactive power. You paid for a full glass but can only use the liquid. A low power factor means your glass is mostly foam — and PG&E charges you for the whole thing.

PG&E's commercial tariffs (Schedules B-19 and B-20) set 85% as the baseline power factor. If your facility's monthly average power factor falls below that threshold, your total monthly bill is increased by a set rate for each percentage point below 85%. Because the penalty applies across all your kilowatt-hour consumption that month, it compounds significantly at higher usage levels.

A facility losing $500/month to a PF penalty at modest consumption could be losing multiples of that at high consumption — for the exact same power factor ratio. Most commercial facilities with motors, compressors, and HVAC equipment operate below this threshold without knowing it.

PG&E measures how many reactive kVAR-hours your facility drew over the entire billing month, compares that to your total kilowatt-hours consumed, and derives your average monthly power factor from that ratio. It is a monthly average — not a snapshot — rounded to the nearest whole percent.

This is why a building full of motors and compressors running continuously all month will consistently show a poor power factor reading. The measurement happens at your service entrance — the single point where all power entering your building is totaled.

Reactive power (measured in kVAR) is the power that charges and discharges magnetic fields in motors, transformers, and other inductive equipment. It does no useful work but must still be generated, delivered, and sized for across every wire, transformer, and breaker between PG&E's substation and your building.

PG&E charges for it because delivering reactive power requires infrastructure capacity — capacity that could otherwise serve real, useful power. The power factor penalty is their mechanism for recovering that cost from facilities that draw excessive reactive power.

The primary causes are:

Electric motors — especially when running at partial load. A motor at 25% load may have a power factor as low as 0.55.
HVAC compressors and refrigeration equipment — running continuously and drawing significant reactive power.
Variable Frequency Drives (VFDs) — without built-in Power Factor Correction, they worsen power factor even while saving energy.
Older fluorescent lighting — with magnetic ballasts, power factor can be as low as 0.50.
Welding equipment and arc loads — highly inductive.
Lightly loaded transformers — contribute reactive demand even when equipment is idle.

Most commercial buildings have multiple sources running simultaneously — which is why the problem must be addressed at the facility level, not equipment by equipment.

Variable Frequency Drives (VFDs) are electronic controllers that regulate motor speed by varying the frequency of electrical current. They are common in HVAC systems, pumps, fans, and conveyors because they save energy by running motors at lower speeds when full power is not needed.

However, VFDs without built-in Power Factor Correction (PFC) worsen your facility's overall power factor even while saving energy elsewhere. And here is the critical point: even VFDs that include correction only address that single unit. Your power factor penalty is calculated across your entire facility at the service entrance — so no single piece of equipment, regardless of how sophisticated, can solve a building-wide problem.

Look at your PG&E bill for line items referencing power factor adjustment, reactive demand, or kVAR charges. The penalty typically appears as a percentage adjustment to your total bill and is easy to overlook if you do not know what to look for.

If you are unsure, send us 12 months of bills and we will identify it for you at no cost. Most facilities paying the penalty have never been specifically told about it — and most have been paying it for years.

A demand charge is a monthly fee based on your single highest 15-minute average power reading during the billing period. PG&E records your power draw in 15-minute intervals every day of the month. Your highest single reading — even if it happened only once, even if it was accidental — becomes your peak demand and is billed at a flat per-kilowatt rate for all 30 days.

One compressor startup, simultaneous HVAC cycling on a hot afternoon, or equipment coming back online after a power interruption can set your demand ceiling for the entire month. That one 15-minute spike is effectively a tax on every other hour of the billing period.

Your energy charge ($/kWh) is based on how many total kilowatt-hours you consume — the more you use, the more you pay. It varies by time of day under PG&E's time-of-use rate structure.

Your demand charge ($/kW) is based on your peak power draw in any single 15-minute window during the month — regardless of how efficient you are the rest of the time. You could be perfectly efficient for 29 days and 23 hours, but one brief surge sets your demand ceiling for the entire month.

Most commercial facilities are billed on both simultaneously. The demand charge is often the larger of the two and the one most business owners do not fully understand.

Under PG&E's commercial B-rate schedules (B-19 and B-20), commercial customers have three distinct pricing tiers:

On-Peak: 4–9 PM every day of the year — including weekends and holidays. Highest per-kWh rate.
Super Off-Peak: 9 AM–2 PM, March through May only. Lowest per-kWh rate — the cheapest window to run heavy loads.
Partial-Peak: All other hours. Mid-tier rate.

Your demand charge is based on your highest 15-minute power reading regardless of what time it occurs — it is not limited to peak hours.

To a limited degree. In facilities where it is feasible, staggering large motor startups by even 30 to 60 seconds can reduce the 15-minute peak reading. Pre-cooling your building before 4 PM and raising HVAC setpoints slightly during peak hours can also help at the margins.

However, in most commercial settings these are supporting strategies, not primary solutions. They require operational discipline and do not address the underlying power quality issues that may also be inflating your apparent demand. The most reliable way to permanently reduce your demand charge ceiling is through facility-level power conditioning that reduces your peak kW draw at the service entrance.

No. Solar reduces the kilowatt-hours you draw from the grid but does not change your power factor ratio. Power factor is based on the relationship between reactive power and real power — not on total consumption.

Here is a concrete example: if your facility draws 100 units of real power and 30 units of reactive power, your power factor is determined by that 30-to-100 relationship. If solar reduces your real power draw to 50 units but your motors still generate 15 units of reactive power, the ratio — and the penalty — has not changed. You could cut your grid consumption in half and still pay the exact same power factor penalty.

No. Batteries store and discharge real power (kilowatt-hours). They do not generate or absorb reactive power, so they have no effect on your power factor reading or penalty.

Battery storage is valuable for reducing demand charges during peak hours by discharging during the 4–9 PM window, but it does not address power factor. The two problems require different solutions.

Solar reduces your kilowatt-hour consumption but does not address two of the three major cost drivers on a commercial PG&E bill: power factor penalties and demand charges.

If your facility has poor power factor, motors and compressors are still generating reactive power regardless of your solar production. And your demand charge is set by your single highest 15-minute power spike — which solar does not prevent.

Many commercial customers with solar are still paying significant penalties and demand charges they have never been told about. A free bill review will tell you exactly what is driving your bill.

Modestly. LED fixtures with quality drivers have power factors of 0.90 or higher, compared to old magnetic fluorescent ballasts at around 0.50. So replacing old lighting does improve power factor slightly.

However, in most commercial buildings motors and HVAC equipment dominate reactive demand — lighting is a small fraction of the total. Replacing lighting alone will not move your facility's overall power factor above the 85% threshold if you have significant motor loads running.

Capacitor banks installed at your main service panel or near individual motors generate reactive power locally — so your equipment gets what it needs without pulling it from PG&E. Your power factor rises, the penalty disappears, and your apparent power draw drops.

Automatic Power Factor Correction (APFC) systems do this dynamically in real time, switching capacitor stages on and off as your equipment load changes throughout the day.

Both solutions address the problem at the facility level — which is the only level where PG&E measures it. Payback on correction equipment is typically 1 to 3 years before accounting for any additional savings from reduced apparent power demand.

A fixed capacitor bank injects a constant amount of reactive power at your service panel. It is simpler and less expensive, and works well for facilities with relatively consistent loads.

An Automatic Power Factor Correction (APFC) system monitors your load in real time and switches capacitor stages on and off automatically as your equipment cycles. APFC is more effective for facilities with variable or unpredictable loads — such as those with refrigeration compressors, manufacturing equipment, or HVAC systems that cycle frequently throughout the day.

Payback on power factor correction equipment is typically 1 to 3 years, depending on the size of your facility, your current power factor, your monthly utility spend, and the correction method used.

The payback calculation is based on eliminated penalty charges alone — before accounting for any reduction in apparent power demand, reduced equipment wear, or energy efficiency gains from lower line current. For facilities with high utility spend and poor power factor, payback can be under 12 months.

Because PG&E measures power factor at your service entrance — the single point where all power entering your building is totaled. Every motor, compressor, transformer, VFD, and piece of equipment in your facility contributes to your reactive power load simultaneously.

Correcting one piece of equipment, switching to LEDs, adding solar, or installing batteries only addresses a fraction of that total load — and PG&E does not see individual circuits. They see the whole building, all at once, every billing month. The only effective correction is one applied at the facility level, upstream of everything, where the problem is actually measured.

PG&E's commercial tariffs (Schedules B-19 and B-20) establish 85% as the baseline power factor for billing purposes, as filed with the California Public Utilities Commission.

Below 85% — a penalty is applied for each percentage point below the threshold, calculated against your total monthly kWh consumption.
Above 85% — a small credit is applied for each point above, as a reward for efficiency.

The threshold applies to your monthly average power factor, not to a single reading.

These are PG&E's primary commercial and industrial rate schedules, which became mandatory for most commercial customers in March 2021.

Schedule B-19 applies to commercial customers with peak demand between roughly 75 kW and 499 kW.
Schedule B-20 applies to larger commercial and industrial customers with peak demand of 500 kW or more.

Both schedules include time-of-use energy charges, demand charges, and the power factor adjustment clause based on the 85% threshold. Understanding which schedule you are on and how each component is calculated is the first step to managing your bill effectively.

We serve commercial and industrial facilities throughout the PG&E service territory in the Central Valley and Northern California — including Lodi, Stockton, Modesto, Fresno, Sacramento, Turlock, Merced, Visalia, Bakersfield, and surrounding communities. If your facility is served by PG&E, we can help.

Yes. The initial discovery — reviewing 12 months of your electric and water bills — is always free with no commitment and no consulting fee.

Our compensation is built into the solutions we deploy, so we only recommend something when the financial case is real and the numbers support it. If we review your bills and find nothing meaningful, we tell you that — no recommendation, no cost, no obligation. We measure first. We recommend second.