In basic terms, the power factor is necessary for the calculation of your demand charges. Power Factor ranges from 0 to 1 (where a PF close to 1 is good, but a PF close to 0 is bad). The demand charges are shown on your monthly electric bill and the units are in kVA. The higher the demand charge the more money you will spend!
The best way to explain PF is to go back to the theory, lets use a motor as an example, but PF essentially affects the entire electric consumption in your building/house.
A typical motor that it be for a water pump in your house or the compressor motor for your refrigerator uses two types of power: average power (lets denote it by P) and imaginary power (lets denote it by Q). The sum of those two powers is called the apparent power. Thus, the apparent power = P + jQ, where we have a j in front of the Q to denote that it is imaginary.
Before I go too much in detail, as an FYI in case I use different terminology:
Average power = real power =load power = Watts (W)
Resistive power = imaginary power = magnetizing power = Volts*Amperes Resistive (VAR)
Apparent power = total power = motor power = Volts*Amperes (VA)
The real power is essentially the power that most people think about. Its the power necessary to overcome the load that is "fighting" against the motor spinning. Thus more load current is being drawn by the motor when there is more load.
You must now be wondering why we have an imaginary power component? Well, motors also require a magnetizing current to operate. In other words this imaginary power component provides a magnetic field that will let the motor spin. It is a constant current element, and is just used to physically have the motor spin. Like mentioned above, the units for imaginary power (VAR) are different from real power (W).
The other difference between the real power and imaginary power is on the sine wave. The load current (real power) is always in phase with the voltage. On the other hand the magnetizing current has a 90 lag behind the voltage (and thus the load current as well). Thus, the sum of the two powers (ima + real) generates a phase shift that is somewhere between 0 degrees and 90 degrees.
The power factor is in essence the offset in time between the voltage and total current being delivered to the customer's main breaker. Or in other words, the PF = cos (total phase shift between motor current and voltage).
If the total phase shift is 0 degrees, then the PF = cos (0) = 1, which is "ideal"
If the total phase shift is 45 degrees, then the PF = cos (45) = .5
If the total phase shift is 90 degrees, then the PF = cos (90) = 0, which is not good
If its a bit confusing thinking in terms of angles look at this graph below,
Real power = x-axis
Apparent power = hypotenuse
Real power / apparent power = cos(theta)
As I mentioned above the closer your PF = 1, the less you will be charged by the utility. Why is that? The magnetizing current is different from the load current (units are different), thus the utility needs to supply you two different types of current. The more magnetizing current that they need to provide you, the less they can provide to another customer. Thus if a bunch of different customers are drawing a ton of imaginary power at once, then it will be a basic high demand, low supply model. An example is in Dallas, Texas in mid july around 2 pm. It's hot and everybody kicks up their AC, thus you've got a lot of electric demand on the grid at that point and you're going to pay for it!
What to do to reduce that power factor if you want to save money?!
The answer would be to hook up a power factor correction capacitor on your motor or your power consuming device. This capacitor supplies the "magnetizing current" so that the cable that connects the power source to the load only needs to provide load current.
For industrial facilities that want to kick up their PF, a capacitor bank near the facility provides the imaginary power (VARs) to correct undesirable characteristics.
A quick example of power factors on various motor sizes
Power (HP) - 1/2 load
0-5 HP = .72 PF
5-20 HP = .74 PF
20-100 HP = .79 PF
Power (HP) - Full load
0-5 HP = .84 PF
5-20 HP = .86 PF
20-100 HP = .89 PF
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