In short
- Load factor is average demand divided by peak demand over a period. The EIA defines it as the ratio of average load to peak load during a specified interval.
- From a bill: kWh ÷ (peak kW × hours in the period).
- On a demand-metered tariff, a low load factor spreads each dollar of demand charge over fewer kWh, so the all-in price per kWh rises.
- Load factor improves when the peak falls or when energy rises without a new peak. Only the first reliably cuts the bill.
- It is the quickest way to tell whether a site's problem is how much it uses or when it uses it.
Two facilities sit on the same commercial tariff, receive the same demand rate and the same energy rate, and consume roughly the same kilowatt-hours a month. One pays noticeably more per kilowatt-hour. Nothing on either bill is wrong. The difference is load factor, and it is one division away from any bill you have in front of you.
The definition
The U.S. Energy Information Administration defines load factor as the ratio of the average load to the peak load during a specified time interval. On a monthly bill that interval is the billing period, the average load is the energy divided by the hours, and the peak load is the billed demand.
A load factor of 1.0 would mean the site drew exactly its peak in every interval of the month — a flat line. Nothing real is flat, so the number always sits below 1. The lower it is, the more the month's energy was delivered in a short burst rather than spread evenly.
Calculating it from a bill
You need three numbers, all printed on any demand-metered statement: kWh for the period, peak kW, and the number of days.
Load factor from one monthly bill
A 30-day billing period. Bill shows 180,000 kWh and a peak demand of 600 kW.
- Hours in the period: 30 days × 24720 h
- Average demand: 180,000 kWh ÷ 720 h250 kW
- Peak demand from the bill600 kW
Load factor: 250 ÷ 6000.42
Equivalent shortcut: kWh ÷ (peak kW × hours). 180,000 ÷ (600 × 720) = 0.42. Figures illustrative.
Use the billed peak, not a number you remember from the meter display, and make sure the kW figure is the one the demand charge is calculated on. If the tariff has both facility and on-peak demand, compute load factor against each; they answer different questions, as covered in facility versus on-peak demand. If a ratchet is in force, the billed demand may be higher than anything the meter recorded this month — see ratchet clauses — and the load factor computed against billed demand will look worse than the physical one. Both are worth knowing.
Why it changes your real price per kWh
On a tariff with a demand charge, the bill has two main parts: energy, which scales with kWh, and demand, which scales with the single highest interval. Divide the total by the kWh and you get the all-in rate. The demand portion of that rate is the demand charge spread across however many kWh the site used, and load factor decides how thin the spread is.
Same tariff, two load factors
Both sites: $15.00 per kW-month demand charge, 8.0¢ per kWh energy, 30-day month, 180,000 kWh.
- Site A peak demand600 kW
- Site A load factor: 180,000 ÷ (600 × 720)0.42
- Site A demand charge: 600 kW × $15.00$9,000
- Site A energy: 180,000 kWh × $0.080$14,400
- (Site A all-in: $23,400 ÷ 180,000 kWh)13.0¢ / kWh
- Site B peak demand375 kW
- Site B load factor: 180,000 ÷ (375 × 720)0.67
- Site B demand charge: 375 kW × $15.00$5,625
- Site B energy: 180,000 kWh × $0.080$14,400
- (Site B all-in: $20,025 ÷ 180,000 kWh)11.1¢ / kWh
Monthly difference for the same energy$3,375
Same kWh, same tariff. Site A pays about 17% more because its energy arrives in a sharper peak. Figures illustrative; use your own schedule's rates.
That is why comparing your cents per kWh with a neighbor's, or with a state average, says little on its own. The EIA's published average prices by sector are useful context, but a demand-metered site's effective rate is set by its own load shape at least as much as by the tariff.
The general relationship
Spread across a month, the demand charge adds this much to every kWh:
demand adder per kWh = demand rate ÷ (load factor × hours in the period)
At $15 per kW-month over 720 hours, the adder is about 5.0¢ per kWh at a load factor of 0.42, 3.1¢ at 0.67, and 2.3¢ at 0.90. The curve is steep at the bottom and flat at the top. Moving a site from 0.30 to 0.45 is worth far more per kWh than moving one from 0.75 to 0.90, which is a useful sense check on where effort pays.
| Load factor | Demand adder per kWh | What it usually looks like |
|---|---|---|
| 0.20 | 10.4¢ | Short, intense operating window; large equipment started together |
| 0.35 | 6.0¢ | Single shift with a sharp morning ramp |
| 0.50 | 4.2¢ | Long single shift or two shifts with a peaky start-up |
| 0.70 | 3.0¢ | Two to three shifts, steady process load |
| 0.90 | 2.3¢ | Near-continuous operation with very little variation |
The right-hand column is a description of shape, not a benchmark. Your own interval data — see how to get interval data — will show which pattern your site actually follows.
Two ways load factor rises — and only one is good
Load factor is a ratio, so it moves for two reasons.
The peak falls. Staggering equipment starts, limiting simultaneous loads, shifting a batch process out of the busiest hour: the energy is about the same, the peak drops, the ratio rises and the bill falls. This is what the peak demand reduction methods on this site are aimed at.
The energy rises without a new peak. Adding a night shift or a new load that runs in the valleys raises kWh and leaves peak kW alone. Load factor improves and the average price per kWh falls — but the bill in dollars goes up, because you are buying more energy. That can be a perfectly good business decision. It is not a saving, and it should not be reported as one.
The practical rule: use load factor to diagnose, and dollars to decide.
Using it as a diagnostic
Compute load factor for each of the last twelve bills and lay the numbers side by side.
- A steady number means the shape of operations is stable. Savings will come from lowering the peak itself, not from fixing an occasional spike.
- One or two months well below the rest usually mean a single event set the peak: a start-up after a shutdown, a test, a heat wave. Find the interval and the cause, because if a ratchet applies, that one month may keep billing for a year.
- A drop in summer only points to cooling load stacking on top of process load in the afternoon.
- A gradual decline over the year suggests new load has been added in the peak hours, or controls have drifted.
- A high load factor and a high bill means the problem is the volume of energy or the energy rate, not the shape. Look at choosing a rate schedule and efficiency rather than peak control.
Where tariffs use it directly
Some rate schedules refer to load factor explicitly: as a condition of eligibility, or through rate designs that lower the energy price as the number of kWh per kW of demand rises. If yours does, the same arithmetic above tells you what crossing a threshold would be worth. The tariff book guide explains where those conditions are usually written.
Where to start
Take the last bill, divide kWh by peak kW times hours, and write the number down. Then compute the demand adder per kWh. If it is a large share of what you pay per kWh, the shape of the load is where the money is, and demand charges explained is the next page to read.
