Understanding electricity tariffs in the context of Power Factor Correction (PFC) - A tutorial

By Ian Boake, Pr. Eng and Brian Dowding, Pr. Eng for Dowding, Reynard and Associates (Pty) Ltd
Electricity tariffs dictate how consumers are billed for their electrical energy. The main costs associated with this
electrical energy are: the cost of generating the energy and the cost of getting it to a consumer (the transmission,
distribution and reticulation cost). These costs are contained in the tariff components, in one form or another, and
an understanding of them will result in a better understanding of electricity tariffs.
Due to technological and metering constraints, the tariff for large power users historically consisted of two
components, hence the name 'Two-Part Tariff'. It comprised a charge for the energy consumed (charged in kWh
units) and a charge for the maximum demand incurred during the billing month (charged in kW units).
Maximum demand power relates to the maximum current drawn from the system. As a system is built to handle
peak currents, the demand portion of the tariff reflects equipment costs, i.e. CAPEX, whereas the energy charge
represents fuel, labour and maintenance costs, i.e. OPEX. The greater the current the more copper (or aluminium
in the case of modern transmission, distribution and reticulation lines) is needed to conduct that current. With
insufficient copper, the protection circuits trip for excessive currents. Also, if there is not enough copper in the
network, a large voltage drop occurs across the supply network resulting in a less than optimum voltage for the
consumer. The voltage has to be maintained within certain limits for electrical machinery such as motors to
function correctly. To estimate the amount of copper required to supply a particular consumer, a demand
component was introduced into the electricity tariffs. These 'Two-Part' tariffs were known as the 'Standard rate' and
the 'Night save' tariffs for large consumers in South Africa.
In older tariffs only the current which would result in work done was considered; the so-called 'watt-less' component
was not considered. As a result, only the watt power (commonly called the 'Active Power' or the 'kWs') was taken
into account when demand was considered.
The next step in the evolution of the tariff was to consider the additional loading that the watt-less current (the
'reactive current') would impose on the network. This current, although it requires much more copper, is essential to
the operation of electrical motors and transformers, which need it for magnetization purposes. Without the
magnetization of cores in transformers and machines they would be unable to perform their intended functions.
The reactive current flows from the generators to the machines and back again without doing any work. The
product of this current with the voltage is called the reactive power ('kVArs'). When this reactive power is provided
at the machine by means of a capacitor bank, very little reactive power has to flow through the network, and the
power demand on the network is reduced. This phenomenon is called Power Factor Correction (PFC). Power
Factor is defined as the ratio of the Active Power ('kWs') over the Apparent Power ('kVAs'). The apparent power is
related to the active power by means of the following equation:

Equation (1), a pythagorean equation, can be represented using a triangle:

It can be observed from Figure 1 (a 'Power Triangle') that the ratio of Active Power ('kWs') to Apparent Power
('kVAs'), defined as the Power Factor, is equal to the cosine of the angle between them. Using the rather
exaggerated example in the 'Power Triangle' (the angle is usually smaller in practical situations) this statement is
proved by the following calculation:

If the reactive power through the network is zero then the angle shown in the 'Power Triangle' is zero and the Active
Power ('kWs') and the Apparent Power ('kVAs') are identical. This is the ideal scenario as only that power, the
Active Power ('kWs'), which performs work and which can usually not be generated economically on site, is drawn
from the supply network.
The new tariffs needed to take into account customers who did not have a Power Factor close to unity (ie the angle
not being close to zero), since the non-zero Reactive Power ('kVArs') imposed additional loading on the network, as
the current flowing was higher than it needed to be. The solution was to charge consumers for demand in terms of
Apparent Power ('kVAs') measured, since this demand measurement explicitly takes account of a low Power Factor
(PF).
As consumers do not all draw a constant power from the supply network during each half hour of the day, peaks
and troughs result in a consumption profile displaying the summation of all loads added together. An example of
such a 'Load Profile' is illustrated in Figure 2. In reality the 'Load Profile' has a far less regular shape as power is
not drawn in smooth blocks. The diagram does however serve to simplify the explanations given here.

If, for the sake of simplicity, the power to serve this 'Load Profile' is generated by three generators, indicated by the
three colours in Figure 2, then it can be observed that each generator is not selling the same amount of energy
each day.
Each block represents 100MWh of energy sold. The yellow generator sells the most energy and represents
7200MWhs of energy for the day. The green generator sells 5100MWhs of energy for the day and the red
generator only sells 1800MWhs of energy for the day. If each generator is regarded as an individual business unit
and we assume (for simplicity) that the capital and operating and maintenance costs are the same for each
generator, then those generators that operate for shorter periods in the day (the so-called 'Peaking Units') would
have to sell their energy at a higher cost than the generator which generates revenue for itself over the entire day to
make the same profit. For example, the red generator would have to sell its energy at four times the cost of the
yellow generator to have the same return. In reality the process is more complicated, but this illustration serves to
emphasize the point that electrical energy has a 'Time-of-use' cost.
This observation led to the development of 'Time-of-use' (TOU) electricity tariffs which charge more or less for
electrical energy depending on the cost incurred in generating that electricity for the particular time interval. Note
that system peaks are higher in winter than in summer in South Africa and that energy is consequently also more
expensive then. The nature of the profile encourages generating companies to use their lowest cost machines for
the base-load ('yellow' periods) and the oldest, least economical machines for the peak load, which adds to their
unit cost.
The 'Time-of-use' tariff for large power consumers in South Africa is called the 'Megaflex' tariff and applies to
consumers with loads greater than 1MVA. With the implementation of this tariff reactive power was billed by
accumulating the energy and charging the consumer for those units of reactive power (in units of kVArh) where the
Power Factor was below 0.96 on average for the month. With reactive power taken care of in this way the
consumer was charged for Active Power ('kWs') demand rather than for Apparent Power (kVAs) demand. This was
forgiving compared to the 'Two-Part Tariff' where demand was measured in terms of Apparent Power ('kVAs'). In
the case of the 'Two-Part Tariff' a loss of Power Factor Correction (PFC) equipment during maximum demand
would be heavily penalized by larger Apparent Power demand charges. On the TOU tariff the charge for reactive
energy is spread out over the month so a short duration loss of PFC equipment would have little impact on the
monthly reactive energy charges. Caution is advised here as it appears that the utility is planning to opt for an
Apparent Power ('kVAs') based demand charge, albeit with some modifications, in the future.
In terms of electricity charges it is important to consider a consumer's use of the network. If a consumer takes
power at a higher voltage level the utility does not have to purchase and install one step-down transformer for that
consumer. The consumer is responsible for that transformer himself, if indeed he needs it. The consumer is
rewarded for this higher supply voltage by paying a lower 'Voltage Surcharge'. Another cost is the 'Transmission
Surcharge' which becomes greater the further a consumer is away from the electricity generating plant. This is
because the further the consumer is from the generating plant, the greater the network assets needed to deliver

the required power.

The lead-time for a coal-fired generation station is about 10 years. For a transmission substation it is five years and
for a locality substation, about two. The utility therefore needs regular information updates from large consumers as
to their planned demand. If the planned demand is over-estimated by the consumer then the network is overcapitalized by the utility. Demand charges are being changed in South African electricity tariffs so that customers
will be penalized for reserving a portion of the network's capacity (via the so called 'Notified Maximum Demand'
(NMD)) but not using it as reflected by the monthly demand incurred. This quantity is called the 'Utilized Capacity'
and is expected to become one way of charging consumers for their use of the network. The 'Network Charge'
(NC) is calculated as follows:
The largest of either:
The highest Apparent Power ('kVAs') monthly demand over the last twelve months
OR
A percentage (60% is expected for 2004) of the Notified Maximum Demand
The implication of this Network Charge is that if a consumer specifies a high Notified Maximum Demand (NMD) but
does not use that network capacity then that consumer will still pay for the capacity being made available to
him/her. The risk of under-specifying the NMD is that the utility may have insufficient capacity available in the
network for a consumer to exceed the NMD unintentionally, thereby causing a loss of supply to that consumer. This
charge also penalizes the occasional power user who has to pay for a once-off high demand by being penalized for
the next twelve months.

Figure 3 shows how the Network Charge (NC) for the following month is determined by what occurred during the
past twelve months. The implication for power factor correction (PFC) equipment is that even greater availability of
equipment will be required than in the classical 'Two-Part' tariffs. A failure of the PFC equipment in the current
month period will result in the highest actual demand and thus penalization for the next twelve month period.

The more familiar Apparent Power ('kVAs') demand charge will be retained and will continue to provide an incentive
for power factor correction (PFC), albeit with less of an incentive from this tariff component as the Rand/kVA price
of the demand component is set to drop next year. The introduction of the Network Charge (NC) in R/kVA next year
will ensure that an additional financial incentive exists for the application of power factor correction (PFC). This is
said with the proviso that maximum availability of PFC equipment is maintained or else punitive charges for a
power factor correction failure incident will come into play.
Resum:
Ian, a Professional Engineer, has worked with Eskom as a Senior Power Quality Engineer. He was involved in
power quality research, investigations and customer supply contracts. Later, with a group of consulting engineers,
he was involved in distribution network master-planning using a GIS database and load flow simulator. As a Power
Systems Engineer at DRA Mineral Projects, Ian has been in charge of: harmonic impact studies, power quality
investigations, tariff impact studies, load studies, design and installation of power factor correction equipment and
load management systems for large mining groups.