How to reduce energy contract penalties in your company

Submitted by Aline Gonçalves on Tue, 03/12/2019 - 17:56
How to reduce energy contract penalties in your company

Do you know what energy contract penalties are and how to avoid them? In this article we will address three situations that can strain your energy bill and what measures you can take to keep them from happening.


The reduction of operational costs is essential for improving product pricing, and also increases profitability and makes your business more competitive. When it comes to factors that escape the budget and directly impact cost indicators, penalties of any kind play a significant role.

It's no different with your company's energy bill. Penalties assessed in the bill can be eradicated, but to do this you will need to understand their root cause, fully understand your company's invoicing process, develop a suitable action plan, and create indicators to mitigate the great villain of accuracy of your budget.

Upon receiving the electricity bill from the distributor, when applicable it is possible to verify items considered in breach of contract, that is, situations where the company failed to comply with contract rules established by the Brazilian Electricity Regulatory Agency (ANEEL) and was fined. They include exceeding contracted demand, excess consumption of reactive energy, and penalties for late payment.

Penalty for Exceeding Contracted Demand

The Brazilian electricity system is comprised of a distribution network planned to ensure service for all customers. To ensure that energy is supplied without interruption, safely, and in a high-quality manner, customer consumption profiles must be well understood.

The consumption profile is also described by the contracted demand, or according to art. 165 of ANEEL Normative Resolution 414/2010, by the active or relative electrical powers requested of the electricity system by the portion of the installed load in operation in the consuming unit, expressed in kilowatts (kW) and kilovolt-amperes reactive (kVAr) respectively.

In short, demand should be contracted based on the sum of the loads installed in your company, including motors, heaters, refrigerators, lamps, and other installed electrical equipment.

The concept of demand is used as a parameter in the electricity supply contract to ensure that consumers will operate within the contracted limit, thus avoiding overload of the system due to lack of planning.

In addition to suffering a possible electricity supply cut, if the limit is exceeded the customer is exposed to penalties for excessive energy use, the cost of which may be double the cost of the contracted demand.

Knowing your load profile well and contracting an appropriate amount of demand is the first way to avoid the penalty. However, when the company's activities are already started, it is important to monitor improvements and expansions since the inclusion of new equipment directly impacts the increase of demand required from the electricity system.

In parallel with the expansion project, the sum of the new loads should be considered and a request for a demand increase should be made if necessary. To request the new contract, a local concessionaire should be contacted at least 30 days prior to the start of the billing cycle to be considered with the new contracted value.

Penalty for Excessive Reactive Energy Consumption

The electricity responsible for the functioning of equipment such as motors, refrigerators, and ovens is comprised of two components: active energy, measured in kWh, and reactive energy, measured in kVAr:

Active energy: the energy that performs work, that is, converts electricity into movement, heat, luminosity, or other useful physical effects.

Reactive energy: has the function of generating magnetic flux in the coils of the motor, for example.

According to Nelson Kagan in his book Introduction to Electricity Distribution Systems (2010), the two powers are related by an efficiency factor, or power factor, that indicates how efficiently energy is being consumed in your installation.

In short, the closer to 1 this factor is the more efficient consumption is, that is, the installation is consuming more active energy than reactive energy. In Figure 1 it is possible to see this relationship and understand how the power factor can be calculated.


Figure 1 - Representation of the power factor. Source: Kagan, 2010 

The structure of the electricity transmission and distribution system was not planned to supply high levels of reactive energy, and even though it is indispensable for the functioning of electrical machines, excess consumption of reactive energy strains the electricity system, leading to additional energy bill charges if consumption exceeds permitted levels.

Based on the relationship shown in Figure 1 above and cited in art. 95 of Normative Resolution no. 414, ANEEL sets 0.92 as the minimum limit of the power factor for consumption units of groups A and B, that is, the relationship between active power and reactive power should be between 0.92 and 1. If the average monthly power factor is above this level, the consumer will be subject to a penalty on the next invoice for excessive reactive energy consumption.

To avoid this situation, it is the responsibility of the consumer to monitor reactive energy consumption by shutting down motors and transformers that are operating under no-load conditions to assess the possibility of exchanging obsolete equipment for more efficient machines, if applicable, install a capacitor bank, and develop an effective maintenance plan for banks already installed.

Penalty for Payment Delay

Another charge that adversely impacts electricity cost planning is penalties resulting from delay in paying invoices. It may seem simple, but in large companies that have innumerable consumption units, and consequently innumerable energy bills, management combined with the company's payment process can become a cumbersome activity.

The first measure to be taken (and simplest up to now) is to have a complete list of all consumer units along with the dates their energy invoices are generated and the dates they are due. The next step is to understand how your company's invoice payment process works, and if there isn't one to design a flow of related activities, defining actions and responsibilities for each.

Then if necessary, negotiate with the supplier the date for payment that works best for your company. Another measure is to monitor penalties via quality indicators, creating action plans to avoid reoccurrence of payment-delay penalties. Operational processes with respect to the payment of energy bills should also be written, and personnel trained who are involved in maintaining an updated review plan.

How to eliminate penalties using an energy management system

Now, imagine a scenario where the three situations mentioned above – Excessive Demand, Excessive Consumption of Reactive Energy, and Payment Delay – can be easily managed, without using countless spreadsheets, and even monitored in real time!

Believe it: This scenario is already a reality for those who use and Energy and Utilities Management System.

By reading energy meters and monitoring data in management control panels, you can get to know your utilization profile of the electricity system. It will be possible to make more assertive decisions in contracting demand levels, and if necessary to scale controllers with the intention of avoiding penalties for exceeding demand.

By managing your reactive energy consumption in real time it is possible to see which sector requires a capacitor bank inspection and even a rescaling of components to optimize operation.

An energy management system makes it possible to automatically process invoices, offering the ability to administer them and their due dates and perform ERP (Enterprise Resource Planning) integration for subsequent automatic payment. Another benefit is the possibility to analyze historical invoice data in order to create comparisons, perform audits according to contract rules and ANEEL regulations, and even simulate invoices starting from a pre-established situation.

With these measures and an efficient energy and utilities management system you will be able to efficiently perform cost management, preventing your company from having to ever pay penalties again for payment delay.


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Energy Management Analyst, Viridis

Energy Management Analyst at Viridis, working in Energy Management and Strategic Planning at Bayer. Trained in Electrical Engineering with emphasis on Control and Automation at the Federal University of Uberlândia. Participated in R&D projects for intelligent energy measurement at Enel and CEMIG, conducted innovation, artificial intelligence, robotics, and gamification projects for corporate environments. 

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