The ratio of average load to maximum demand in the power plant is defined as:

Load factor: The ratio of average load to the maximum demand during a given period is known as the load factor.Load factor = average load/maximum demandIf the plant is in the operation for T hours\(Load\;factor = \frac{{Avearge\;load \times T}}{{Maximum\;demand \times T}}\)\(= \frac{{UNITS\;generated\;in\;T\;hours}}{{Maximum\;demand \times T}}\)The load factor may be daily load factor, monthly or annually if the period considered is a day or month or yearLoad factor is always LESS than 1 because the average load is SMALLER than the maximum demandIt plays a key role in DETERMINING the overall cost PER unit generated.Higher the load factor of the power station, the lesser will be the cost per unit generated, it is because a higher load factor means lesser maximum demandThe station capacity is so selected that it must meet the maximum demandNow, lower maximum demand means a lower capacity of the plant which reduces the cost of the plant