Load factor is a measure of how average usage relates to peak usage. Load factor is calculated as the total usage for a given period of time divided by what usage would have been had peak demand been maintained throughout the entire period. The following calculation measures load factor over the period of one year:
Load factor = Actual annual usage (kWh) / Peak demand (kW) x 8760 hours
Load factor is important since the capacity of electrical transmission and distribution facilities and supply sources must be designed to serve peak usage levels. During the hours when usage is less than peak, a portion of the facilities installed to meet peak loads sits idle. So low load factor customers are typically more expensive to serve. And by improving load factor, the overall cost of electric supply per unit can be reduced.