Usually the electrical power supply companies impose a penalty, if the average power factor over a stipulated period falls below a certain value. A large part of load of bulk comsumers are inductive in nature because of use of induction motors. This causes low power factor (Lagging because of predominately inductive loads). Capacitors, on the other hand, constitute leading power fator load’ thus compensating a major part of the inductive loads and result in power factor close to unity but still lagging in nature.

The improvement of power factor fulfills the requirements of the supply company.

Loads with low power factor draw more current from supply than same active load with high power factor and hence cause increased power loss in supply line. This increase of power loss is a waste for the supply company. Further supply companies need to install higher size transmission / distribution equipment to supply the additional load current becuase of the low power factor. To prevent these, the penalty for low power factor is imposed.