With evolving net-metering regulations and time-of-use rates, battery storage is quickly becoming more than a backup plan — it can deliver real ROI for solar customers. While battery self-consumption helps, there’s now a next step that can save homeowners even more on their electric bills: energy arbitrage.
In this article we’ll look at exactly what energy arbitrage is and how it can help solar customers save more money (and help solar installers sell more).
Solar and storage: energy arbitrage
Battery storage systems paired with solar can provide a unique opportunity for the property owner to save more on their utility bill than a standalone-solar installation — or even a battery that operates in a self-consumption mode. The key concept is charging the battery with PV energy when it’s less valuable to sell the excess energy, and then discharging the battery only when it’s cost-effective to do so. The process of withholding energy in the battery and using it when it’s more valuable is termed “energy arbitrage”, and the end result is an increase in the value of energy generated by the PV system.
The basics: utility rates and net metering policies
Not all installations will benefit from an energy arbitrage dispatch model — there are a few prerequisites. In addition to having an inverter that can control the battery appropriately, energy arbitrage requires a time-differentiated rate structure, where the owner pays more for electricity during some hours of the day, and less in others.
These are commonly referred to as “time-of-use rates” (TOU rates). A less common, but possibly more valuable energy arbitrage case is when the price of energy sold to the grid is higher during certain times of the day, something found in the summer export schedules for California residents in the Net Billing Tariff (also known as NEM 3.0).
Energy arbitrage with TOU rates
“Charge low, discharge high”
Many utilities have TOU rates that feature peak pricing during the evening or occasionally morning hours, say 6pm-9pm in the summer when the customers are using a lot of energy for cooling, or 6am-9am in winters when customers’ aggregate demand is greatest.
Customers pay more to use electricity during these time windows, which means they can increase the value of solar PV generation by storing it in a battery and using it during these peak TOU windows. For example, if a customer would receive 10 cents per kWh of electricity sold to the grid in the middle of the day, but instead they could store it in a battery until the peak TOU window and offset consumption that would have cost 28 cents per kWh later in the day, they save 18 cents per kWh.
In the example below, our energy arbitrage modeling demonstrates how customers can save their energy for when it gives them the best savings. Notice how during the 5pm hour, their consumption is met by solar (in yellow) and the grid (dark red), even though the battery is completely charged to 100%. Then, you can see that between the hours of 6pm and 8pm, the homeowner’s consumption is fulfilled by the battery (demonstrated in dark blue) instead of the grid during the peak TOU hours, when electricity is more expensive.
This is the magic of energy arbitrage: It attempts to avoid discharging the battery when there is little earned value. In the above example, the battery avoids discharging before 6pm, since doing so is not valuable enough.
Energy arbitrage with high export rates
Certain net metering policies, like California’s Net Billing Tariff, include a separate export rate with values that encourage system owners to sell energy to the grid during hours with high demand. The current price structure has high-value discharge hours in summer evenings, when grid demand is especially high. During these windows of opportunity, a battery system can discharge at its maximum capacity and generate a large amount of bill credits for the system owner, which are then used to pay off utility bills later on. For example, from 6-7pm in September, exporting 1 kWh of electricity to the grid results in $3.74 of credits, while exporting that same kWh at noon earns only $0.04 (yes, you read that correctly).
What about self-consumption?
A battery system operating in energy arbitrage mode may result in more grid consumption than a self-consumption battery, either because it attempts to reduce battery discharge to preserve battery life or sends more energy to the grid.
Note that when the system owner has flat rates, the result of self consumption and energy arbitrage should be the same — both modes provide the same value.
How to size a solar and storage system with energy arbitrage for NEM 3.0
The big question is: What’s an ideal combination of PV system size and storage capacity?
For areas where the value of energy arbitrage is driven by TOU pricing, the battery needs to be large enough to cover the customer’s load during the peak TOU hours. A larger system will have diminishing returns, but don’t fret if the battery packs are too large — they’ll become right-sized as the battery ages.
For the California NEM 3.0 scenario, the upper size of the system is no longer constrained by the customer’s load during TOU hours — a customer can continuously add on more PV capacity and storage capacity and dispatch it to the grid during peak export price hours to earn more bill credits. The limiting factor here is how much remaining bill the customer has for offsetting, since the credits can only be used to offset bills and aren’t paid out in cash to the system owner.
The table below shows an example house in Fresno, which has PG&E’s Net Billing Tariff. The low value of midday exported energy means that even though the PV system produces 100% of the home’s kWh load on an annual basis — with only 42% of that energy is self-consumed and the remaining 58% is sold to the grid — the customer only saves 53% of their utility bill.
Note that for this particular customer profile under PG&E E-ELEC at the time of this writing, the average cost of grid energy is $0.51 / kWh. In the PV-only scenario, about half of the energy goes to the grid (valued based on the export rate) and half is self-consumed (valued at mid-day prices). As long as the system levelized cost of energy (LCOE) is below 27 cents per kWh, it’s beneficial to install solar even if it isn’t paired with a battery system.
Let’s look at three September scenarios to illustrate energy arbitrage’s benefits a little more. We can see below that the 1-battery self-consumption system charges from excess PV energy in the morning, and discharges it as soon as possible in the evening — starting in the 4:00pm hour.
Adding on one generic, 13.5 kWh capacity battery pack in self-consumption mode increases bill savings because self-consumption of PV energy goes up to 72%. Switching that same battery system into energy arbitrage mode slightly reduces self-consumption but increases bill savings, thanks to more optimal control. However, in the images below you can see that while there’s a decent-sized battery capacity, the system can’t output enough power to fully take advantage of peak export prices from 6pm-8pm.
Switching that same battery system into energy arbitrage mode slightly reduces self-consumption but increases bill savings, thanks to a more optimal control. In the 1-battery, energy arbitrage system, the system still discharges to meet some of the loads during peak TOU hours. However, you can see that it then attempts to export as much power to the grid as possible from 6pm-8pm during high-value export hours.
Finally, adding on more batteries — or simply more output capacity with a bigger inverter — allows the system to export even more energy to the grid during the power hours, which greatly increases the value of the PV energy.
If we double the battery quantity, bill savings increase, and we can see that the 2-battery system with energy arbitrage almost brings the customer’s bill down to the fixed monthly charge — their summer credits are enough to offset bills for most of the rest of the year.
Ultimately, there is no convenient, universal sizing rule for batteries. In general you’ll still want to stay around 100% energy offset, have enough battery storage capacity to use up most of the excess PV in the middle of the day, and have a high enough power output rating to either meet the home loads or to send a significant portion of energy to the grid.
In closing
Energy Arbitrage is a great way to provide homeowners more return on their solar + storage investment — and it can help you attach more storage to your solar sales. If you’d like to learn more about exactly how it works, get in touch. We’d love to model it out for you.
Ready to get started? Click here to sign up with Aurora without talking to anyone.