(NASDAQ:TSLA) Tesla's battery - a good fit for time-of-use arbitrage but investors beware
It’s widely hypothesized that utility customers who participate in time-of-use (TOU) rate plans will use Tesla (NASDAQ:TSLA) batteries to store off-peak power, either from the utility or from solar panels, and sell it to the utility during peak periods. The 7-kilowatt-hour (kWh) Tesla Powerwall battery, designed for daily charging and discharging, is a good choice for this application, at least in the residential and small commercial markets. But despite the widespread attention it’s gotten, this application—which is known as TOU arbitrage—is unlikely to be a big hit any time soon, for two reasons. First, few utilities allow it. Second, the revenue it can produce is minuscule compared to the cost of the battery.
One reason TOU arbitrage produces small benefits is that TOU pricing isn’t available from utilities every day (see Figure 1). Utility TOU rate plans do feature higher prices for on-peak power than they do for off-peak power, but on-peak power periods are restricted to non-holiday weekdays. As a result, TOU arbitragers can only produce revenue 260 days a year, at best.
But wait—it gets worse. Peak rates are often much lower during the winter than in the summer (in the utility TOU world, there are only two seasons: summer and winter). In the winter, the spread between peak and off-peak power is typically only a few cents per kWh. That’s not even enough to pay for the wear and tear on the battery for a charge-discharge cycle, which limits this application to the summer season, or about 130 days per year.
The figure below shows when peak prices are available from a typical time-of-use (TOU) utility rate program. On summer weekdays, the on-peak period stretches from 11:00 a.m. to 5:00 p.m. On winter weekdays, there are both morning and evening on-peak periods. On weekends and holidays, regardless of the season, the utility charges off-peak rates all day. This particular program also features a midpeak time frame, during which rates are somewhere between on-peak and off-peak.
SOURCE: Ontario Energy Board
Summer TOU peak-period rates just aren’t high enough for potential arbitragers to make enough money on those few days. In the summer, some programs offer a spread between off-peak and on-peak of about $0.25 per kWh. For the 7-kWh Powerwall battery, that works out to $1.75 a day of revenue, or about $225 per year. Those benefits would then be diminished by numerous parasitic losses, including battery and inverter inefficiencies. This battery costs at least $5,000 installed, which yields a simple payback period greater than 20 years. That’s longer than the expected lifetime of the battery. Few people are likely to find this application attractive, at least at current battery prices or at current TOU pricing levels and rules.
This post is the second part of a five part series. The first post, titled Who’s Reserving All Those Tesla Batteries and What Do They Plan On Using Them For? explains why only three of the five applications proposed for the Tesla battery line are likely to be successful. Tomorrow, Part III will look at Tesla's Powerwall and residential backup power.
Jay Stein, Senior Fellow at E Source, is one of America's leading energy technologists. Over the course of his nearly 40-year career he has played numerous roles, including entrepreneur, manager, designer, researcher, and thought leader. Some areas of technical expertise he's well known for include utility emerging technology programs, black box technologies, HVAC technologies, distributed energy systems, and energy storage. He has also authored and coauthored several hundred technical papers, magazine articles, blog postings, book chapters, and conference presentations.