Load Factor: The Number Suppliers Price First

Load factor is a facility's average electrical demand divided by its peak demand over a period, expressed as a percentage: total kWh used, divided by the peak kW multiplied by the number of hours in the period. A facility that draws a steady 500 kW all month has a load factor near 100 percent. One that averages 200 kW but spikes to 800 kW on weekday afternoons has a load factor of 25 percent. The two can use the same kWh and pay very different rates, because suppliers price the cost of serving the peak and utilities bill the peak directly as a demand charge. Load factor is the first number a pricing desk looks at, and the one most buyers have never calculated.

We put load factor on every analysis we send a client, because it explains more about a supply quote than the supplier's name does. This is the explainer we point people to when the number on the page needs a page behind it.

The formula

Load factor equals total energy consumed divided by the energy that would have been consumed had the facility run at its peak demand for the whole period.

Load factor = kWh in the period ÷ (peak kW × hours in the period)

For a 30-day month there are 720 hours. A facility that used 144,000 kWh with a peak of 400 kW has a load factor of 144,000 divided by (400 times 720), or 50 percent. The same calculation works for a year with 8,760 hours, and the annual figure is the one suppliers use for pricing.

Why suppliers care

A retail supplier buys energy in the wholesale market to match the customer's expected hourly usage. Wholesale prices are highest in the hours when the grid is busiest, which are the same hours a peaky commercial load is busiest. A customer with a 25 percent load factor takes most of its energy in expensive hours and little in cheap ones; a customer with a 90 percent load factor takes its energy evenly, including through the cheap overnight hours. The supplier's cost to serve the first customer is higher per kWh, and so is its quote.

Two other costs scale with peak rather than energy and land on the peaky customer:

• Capacity. In PJM, NYISO and ISO-NE the customer's capacity tag is its draw at the grid's peak hours. A low-load-factor facility that peaks on summer afternoons tends to have a high tag relative to its kWh, so capacity cost per kWh is high. Our note on demand and capacity charges explains the tag.
• Demand charges. The utility bills the monthly peak in dollars per kW in the delivery portion of the bill. Two facilities with the same kWh and different peaks pay very different demand charges, and the difference is pure load factor.

A worked example

Two facilities in the same utility territory each use 2,000,000 kWh a year.

Facility A is a cold storage warehouse. Compressors run around the clock. Peak demand is 280 kW; annual load factor is 2,000,000 divided by (280 times 8,760), or 82 percent.

Facility B is an office and light assembly building. It runs from 7 am to 6 pm on weekdays with HVAC and equipment peaking together in the afternoon. Peak demand is 760 kW; annual load factor is 2,000,000 divided by (760 times 8,760), or 30 percent.

On a same-day bid, suppose Facility A is quoted $0.064 per kWh and Facility B $0.074, a difference of a cent that reflects the supplier's higher cost to serve B's afternoon-heavy shape and its larger capacity tag. On supply alone B pays $20,000 a year more for the same energy. On delivery, at an illustrative demand rate of $10 per kW, A pays $33,600 a year in demand charges and B pays $91,200. Same kWh, roughly $78,000 a year apart, and the whole gap is load factor. (The rates are illustrative; the arithmetic is the point.)

Typical values by facility type

These are ranges, not rules; a well-controlled office can beat a badly run plant. The point is that a buyer should know where its facility sits before reading a quote, because a supplier certainly does.

Three ways to improve it

Load factor rises when the peak falls or when the base rises. Only the first is usually worth pursuing.

1. Stop things peaking together. The afternoon peak in most commercial buildings is HVAC and process equipment hitting maximum at the same time. Staggering compressor starts, sequencing large motors, pre-cooling in the morning so HVAC coasts through the afternoon and interlocking non-critical loads so they cannot all run at once can cut peak demand by ten to twenty percent without reducing output. This is the core of peak load management.
2. Move flexible load off the peak. Battery charging, water heating, pumping, ice-making and some batch processes can run at night. Each kW moved from the afternoon to the overnight hours raises load factor twice: it lowers the peak and raises the base.
3. Check the rate class. Some utilities offer tariffs for high-load-factor customers, and some bill demand on a ratchet that punishes a single bad month for a year. A tariff review confirms the facility is on the schedule its shape deserves.

What does not help is using more energy to flatten the curve. Raising the base load raises load factor arithmetically and raises the bill in fact. The goal is the same kWh with a lower peak, and that is a controls and scheduling problem rather than a procurement one. Procurement comes after: a facility that has improved its shape should re-bid, because the quote will reflect it, and the bill will show the demand line falling before the contract does.