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Power factor (PF) is a quantitative measure to determine how effectively the active power is being utilized by the loads. Mathematically, PF is a ratio of active power consumed by the loads over apparent power. When the load is pure resistive (such as a heater), both voltage and current will be in-phase (zero crossing at the same time). In such a case, there is no reactive current. That is, both active and apparent powers will be equal, and the PF would be 1 (best possible scenario). The deviation of load PF from 1 (unity) is mostly due to the presence of reactive element in the load. When the load has inductor (such as, motor), it causes the current to lag the voltage. This is called as lagging reactive current/power. On the other hand, when there is capacitor in the load, current leads the voltage which is called as leading reactive current/power. This reactive power is measured in terms of Volt-Ampere Reactive (VAR). Regardless of inductive or capacitive behavior, the net presence of reactive current (leading or lagging) causes the PF to be lower than 1. Larger is the reactive current, poor will be the PF. Most of the electric loads exhibit inductive characteristics and thus, capacitor banks have been used traditionally to improve the effective load PF. Here, the lagging VARs required by the loads are locally supported (or cancelled) by capacitive leading VARs. This ultimately improves the load PF seen from the distribution system side. Due to this fact, the capacitor banks (controlled or uncontrolled) are used to avoid the penalties related to low PFs.

Many utility service providers are shifting from kWh billing to kVAh system. kWh stands for kilo watt hour and kVAh for kilo volt ampere hour. Majority of industrial, commercial as well as residential loads are inductive in nature. Hence, they draw lagging reactive power from the utility. As we know that reactive power reduces the PF. In kWh billing system, a user is charged for usage of only active power and low PF penalties are imposed to charge for the lagging reactive power. Different states have different incentives/penalties for a range of PFs. Interesting, any leading power factor (situation arises when the load is light and significant capacitor banks are connected to plant) has been treated a unity PF. This practice has two issues: (1) leading PF provides incentive to user as it is treated as unity and (2) leading reactive power is not charged. To overcome these limitations, the kVAh billing system is being introduced that charges the end user for the amount of reactive power drawn from the system, regardless of lagging or leading PF. Thus, without proper correction of PF and maintaining it close to 1, the user may find sudden increase in the electricity bill. Below is an example for the demonstration purpose only. Assume the charge of each unit of kWh and kVAh is same (1 = 1 unit charge).