Rob T from Columbus, OH. AEP Ohio territory. My client runs a CNC machine shop with about 30 machines, mostly older models with big induction motors. They had a capacitor bank installed in 2008 that kept their power factor above 0.90. Sometime in late 2011 the capacitor bank failed — a fuse blew and nobody replaced it. The shop foreman assumed the electrician would handle it and the electrician assumed the shop foreman would call. Nobody did anything. Since then the power factor has been running 0.72 to 0.78 and AEP has been assessing a power factor penalty every month. The penalty line on the bill says reactive demand charge and it has been averaging $1,400/month for over two years. Total penalties paid: approximately $33,600.
Client paying $1,400/month power factor penalty — capacitor bank died 2 years ago
Rob, $33,600 in power factor penalties is painful but common for shops with lots of induction motors and no correction. The immediate question is whether any of that is recoverable. The answer is almost certainly no — the utility billed correctly based on the actual power factor. The capacitor failure is the customer equipment issue, not a billing error. But the value you bring is identifying the problem and getting it fixed. What does a replacement capacitor bank cost for a shop this size?
Randy, I figured the penalties themselves are not recoverable. I got a quote from an electrical contractor — a new 150 kVAR automatic capacitor bank installed and commissioned would cost about $8,500. That eliminates $1,400/month in penalties. Payback period of 6 months. After that it is pure savings.
Rob, before your client spends $8,500 on a new capacitor bank, have them get the old one inspected. If it was just a blown fuse, the repair might be $200-400. I have seen shops replace entire banks when the only problem was a $15 fuse and a corroded connection.
Ray, great call. Had the electrician look at the old bank. Two blown fuses and one swollen capacitor can. He replaced the fuses and the bad can for $650 total. Power factor came up to 0.88 immediately. Not quite the 0.90 threshold to avoid the penalty entirely but the penalty dropped from $1,400/month to about $180/month. He recommended adding one more 25 kVAR capacitor step to get above 0.92 which would eliminate the penalty completely. That additional capacitor is $1,200 installed.
Rob, there is a subtlety in the AEP Ohio tariff on power factor penalties. The penalty is calculated as the ratio of actual kVA to what the kVA would be at 0.90 power factor, and the billing demand is adjusted upward by that ratio. So at 0.78 PF the client is paying demand charges on 115% of their actual kW demand. At 0.88 PF they are paying about 102%. At 0.92 PF there is no adjustment. Make sure you calculate the exact breakeven to confirm the $1,200 capacitor investment is justified.
Walt, ran the numbers. At 0.88 PF the penalty is about $180/month or $2,160/year. The additional 25 kVAR capacitor costs $1,200 and brings PF to approximately 0.92, eliminating the penalty entirely. Payback on the additional capacitor: 6.7 months. Definitely worth it.
One more thing Rob — have the electrician check whether the existing capacitor bank is switching properly. Automatic banks use contactors to switch capacitor steps in and out based on load. If a contactor is stuck, you might have full correction at high load but poor correction at low load. That causes the PF to drop during off-peak hours and some utilities measure PF during the demand peak only while others average it over the billing period.
Lloyd, good point. AEP Ohio measures power factor at the time of peak demand, not as a monthly average. So the PF correction only needs to be adequate during peak production hours. The electrician confirmed the switching contactors are working properly — the bank steps up with load and steps down when machines shut off.
Final update: client approved the $1,200 additional capacitor. Installed last week. First full month bill just came in — power factor 0.93, zero penalty. Monthly savings: $1,400 compared to the pre-repair bills. Annual savings: $16,800. My fee was based on the first year savings so this was a very good engagement for both of us. Total client investment: $1,850 ($650 repair plus $1,200 additional cap). Total first year savings: $16,800. ROI: 808%.
808% ROI for the client. That is the kind of number that gets you referrals. Rob, this case also illustrates an important point — not every audit finding is a billing error. Sometimes the biggest value is identifying operational issues that are driving up costs. The utility billed correctly for two years but the client was hemorrhaging money because of a $15 fuse.
Exactly Randy. I have started including a basic power factor check in every audit for clients with significant motor loads. It takes 5 minutes to look at the reactive demand line on the bill and if there is a penalty, the fix is almost always cheap relative to the savings.