Imagine a city that is a long way from every other city is supplied by a local generator. The generator has a load factor of 1 because its power is consumed locally.

A new generator connects to the network close to this city and there is now more power than the city needs. So the excess power is sent across long distance transmission lines. Because transmitting electricity results in physical losses through heat, the revenue paid to the generator for its output is discounted given some of it is lost on the way.