The Best Battery Size For Solar Sharer

I’m a man with a mission. And that mission is to decide what size battery my sister should get, while taking into account that she’ll be topping it up with free daytime electricity. If I give her a bad answer, I will still be a man — but it may become much more difficult for me to immediately prove it.

Last week, in Part One, I examined my sister’s electricity consumption to estimate how much she would save from various sized batteries. This week, in the Part Two finale, I will work out exactly how much battery capacity my sister should install to make the most of one of the newly released Solar Sharer plans that now offer 3 or more hours of free daytime grid electricity.

There definitely won’t be any Part Three, unless my sister forces me to decide which VPP she should join.

Working Out Battery Size

Last week, I worked out how much my sister could save from a range of battery sizes, based on her past 12 months’ electricity consumption. But to determine what size would be best, I’ll need to work out:

• The return on investment my sister considers acceptable.
• The effect of battery capacity loss.
• The benefit from joining a VPP.
• How much a battery will likely cost.
• What will happen with future electricity prices.
• How much importance she puts on backup power.

Only after taking all the above into account will I be able to arrive at around the right answer.

Finding The Right Electricity Plan

It’s also necessary to find a suitable electricity plan. I decided on one last week, but some good news if you’re looking for a Solar Sharer or other electricity plan: we have a newly updated electricity plan comparison tool you can check out. After entering your postcode, select ‘features’  and ‘free power periods’ to only compare plans with free daytime electricity periods.

Battery Vs. Home Loan

It only makes financial sense for my sister to get a battery if it provides a return better than what she could otherwise get with the money. In her case, she would probably put it towards paying off her home, so a battery will have to beat that. I expect a decent quality battery to last around 15 years, so if total battery savings beat the benefit of putting the money towards her mortgage over that time, the battery will come out ahead.

Current home loan rates are around 6%, but I want to keep everything in today’s money. To do this, I’ll use real interest rates, which are inflation-adjusted figures. Over the past 15 years, the average real home loan interest rate has been around 2%, and I think it’s reasonable to use the same figure for the next 15 years. But because I want to be sure the return will be better than paying off a home loan, I’ll make the required real return 2.5%.

If my sister invested $10,000 for 15 years at 2.5% real interest, she’d have $14,550 in today’s money. That’s around 46% more than what she started with, but to make things simple, I’ll say that a battery with a 15-year lifespan has to result in my sister having 50% more money, in today’s dollars, than what it cost her. This provides considerable wiggle room, so I’m confident this will result in a battery system that gives a better return than putting the money towards her mortgage.

If my sister wanted a very high return, she might ask for one similar to the Australian share market, which has averaged around 6.5% real return over the past 100 years or so. But I don’t think investing in a home battery is directly comparable to putting money in the share market because a battery’s return is far more constant, and you don’t have to pay tax on electricity bill savings.

If you do demand a high return from a home battery, then you may want a smaller battery that will be used at a higher average capacity factor and pay itself off more quickly. But this can cause warranty issues…

This image has nothing to do with my sister. Except for the abomination part.

Higher Returns Can Shorten Warranties

If you’re chasing higher returns, getting a smaller battery and working it harder each day is one way to get them. But this can shorten the battery’s warranty. Most batteries have a throughput limit, and if you go over it, the warranty ends. Using your battery at a high capacity factor is also likely to increase its capacity loss and shorten its overall lifespan. So, attempting to increase return by undersizing your battery may provide less benefit than you expect.

I’m certain the battery capacity I end up recommending to my sister will be large enough to ensure its warranty lasts a full 10 years — or potentially longer for some batteries — but it’s still something to watch out for.

Battery Capacity Loss

Lithium home batteries are the only type available on the market these days, and they all lose capacity with use and over time. Most warranties promise they’ll retain at least 70% of their original capacity at the end of 10 years. I expect decent quality batteries will do considerably better, but I don’t want to be in trouble with my sister by being too optimistic, so I’ll assume her battery capacity will fall to around 70% at the end of 15 years. If we assume this loss is linear, then it will operate at an average of 85% of its original capacity over its lifespan. For most households, a 15% decline in battery capacity will result in less than a 15% fall in battery savings, but the exact effect will depend on household consumption patterns and electricity plan.

VPP Benefit

I will definitely recommend my sister join a VPP, despite the fact that I know she’ll make me do the work of deciding which one is best. VPP payments don’t amount to much, but — provided you join a VPP that suits you — they should be worthwhile.

Battery capacity and power can affect VPP payments, but often not by much. I’ll make the simple assumption that net VPP payments will be $150 per year, plus $1 for every kWh of battery capacity.

There is also a NSW incentive for joining a VPP. While batteries up to 50 kWh can receive it, the maximum payment is reached at 28 kWh. The amount received by households is around $36 per kWh, making the maximum around $1,000.

Battery Cost

A fistful of factors will affect what my sister will pay for an installed battery:

• She’s in a rural area, and this is likely to bump up prices while decreasing options.
• The federal battery rebate is tiered — there’s a big drop in rebate amount per kWh after 14 kWh, and a massive drop after 28 kWh.
• Larger batteries cost less per kWh.
• If she gets a battery over 16 kWh, she’ll want enough inverter capacity to charge it at over 5 kW, which can increase costs.
• She doesn’t already have a hybrid inverter on her solar system, so there will be no savings from that.
• My sister would be a bit thick not to get the NSW VPP payment, so I may as well knock that off the price.
• Batteries vary in price and quality — my sister will want one that’s reliable but not high-end and expensive.

Taking all this into account, I’ll assume she’ll have to pay roughly the following for a fully installed battery:

• 13 kWh   $10,050
• 16 kWh    $10,400
• 20 kWh    $12,200
• 24 kWh   $13,650
• 28 kWh  $15,500
• 32 kWh   $17,400

In practice, you’re unlikely to be able to choose the exact battery capacity you want. You’ll be limited to what’s available and will have to pick what’s close to it.

The battery prices above may also be too low for her rural location, but I figured that if I’m a little optimistic, they’ll be of more use to the majority of people who don’t have to pay the beyond the black stump premium.

Future Electricity Prices

Total savings over a battery’s lifespan depend on future electricity prices. While I’m sure they’ll fall in the long term, at the moment our electricity is still over 50% fossil fuel, and every time an old coal power station closes down, electricity prices are pushed up. Because I don’t expect large falls in electricity prices any time soon, I’ll base battery savings for the first 8 years on the current Solar Sharer plan I recommend my sister get, and for the final 7 years of the battery’s lifespan, I’ll assume savings will be 20% less to allow for potentially lower electricity prices.

Total Battery Savings

Last week, in Part One, I created a graph showing the annual savings my sister would see from batteries of various capacities. Now I’m going to make a graph showing the total savings for different capacity batteries over a 15 year lifespan and use it to determine how large a battery my sister should get.

To calculate total battery savings, I’ve taken the following into account:

• Annual net VPP payments of $150 + $1 per kWh of battery capacity.
• An average usable capacity of 85% to allow for capacity loss.
• Annual savings reduced by 20% in the last 7 years of battery lifespan to allow for potential electricity price falls.

This gives a range of total battery savings for different battery capacities, and is indicated by the blue dotted line on the graph below.

I’ve also calculated how much money my sister would have if she had instead invested the cost of different sized batteries at 2.5% real return for 15 years. This is shown by the orange dotted line on the graph below.

The highest point where the two lines intersect is the financial sweet spot where I’m confident a battery will provide a better return than what my sister would get from putting the money towards her home loan, while not causing her to miss out on battery savings she would consider worthwhile by getting a battery that’s too small.

This is a graph of estimated total battery savings over 15 years, by battery capacity, versus investing the cost of a battery at a little over 2.5% real return for 15 years, for my sister. If you’re not my sister, you may get a considerably different result, even if, like her, you’re in NSW & use around 6,500 kWh of grid electricity per year.

The graph above shows the lines intersecting at a little over 28 kWh, so this is the battery capacity my sister should get if she wants to maximise her electricity bill savings. It’s considerably more than I expected when I first started pulling apart her electricity bills.

Battery Capacity & 2% Real Return

I used 2.5% real return above because I promised my sister a return better than paying off her home loan. But if she was happy with a battery return that was only roughly equal to paying off her mortgage, and didn’t mind if it was a little higher or a little lower, then I would instead use a 2% real return, which gives the following result:

The line intersects at just past 31 kWh, which is 3 kWh more than if she were aiming for a 2.5% real return. This shows that being satisfied with a lower return increases the optimal battery size.

Battery Capacity & 4% Real Return

If my sister insisted on a 4% real return from a battery, then the sweet spot would be just under 22 kWh, as shown by the intersection of lines on the graph below:

If my sister instead demanded a 5% return, then she’s out of luck, because the lines on the graph would miss each other and not intersect at all. This means it would be impossible for her to make a 5% return from a battery with the assumptions I’ve made.

But this doesn’t mean it’s impossible for other people to get a 5% or higher return. If they don’t have to pay as much for a battery, or use more peak period electricity, it’s definitely possible.

Backup Power — Less Important With Daily Charging

While I’ll recommend my sister install 28 kWh of battery capacity to maximise her electricity bill savings, if she’s interested in having reliable backup power, she should install more.

But my sister isn’t really interested in reliable backup power. While she has nothing against it and would appreciate having it if a blackout does occur, she’s not interested in paying more than a trivial amount for it. This is because blackouts rarely happen where she lives and because she grew up in Queensland, where blackouts were common when we were kids, so they hardly bother her.

But with a 28 kWh battery charged daily with free electricity on a Solar Sharer plan, there’s an excellent chance there will still be a decent amount of charge in her battery when a blackout occurs.  So my advice for her is to get a battery that’s 5% larger and use that for a small 5% battery reserve, so there will always be enough charge to at least run the lights, fridge and freezer, and charge her phone during a blackout, until her solar starts producing power again.

A few extra kWh may only cost her around $1,500 or just $100 a year for the expected life of the battery. But I don’t think she’ll consider it worthwhile. This is because with a 28 kWh battery that’s charged from the grid every day, she can simply cross her fingers and hope there will be a decent amount of energy in the battery when a blackout occurs. Most of the time, she’ll be fine, as when the grid fails, she’ll usually have enough charge to get through without any battery reserve.

If you have a decent-sized battery and are planning to charge it daily with free grid power, you can consider whether it’s worthwhile to reduce your reserve, or perhaps get rid of it entirely.

Survival Odds

I think I’ve done a pretty good job of working out how large a battery my sister should buy. If my assumptions are correct, I’ve shown that a home with a fairly typical annual grid consumption of around 6,500 kWh a year, that doesn’t use a large portion of it during the expensive evening peak period, should install a large 28 kWh battery, or slightly more if having reliable backup power capability is important — which it will be for most people.

But I could be wrong. Batteries beyond the black stump may be more expensive than I estimated, or my sister may suddenly demand a considerably higher battery return. It’s even possible she could change her electricity consumption habits. If she ever stops roasting the souls of the dead in an electric arc furnace in the wee hours of winter mornings, that would reduce battery savings — although perhaps not by as much as you’d expect, as she’ll have a low early morning rate.

While my sister could get a higher rate of return by getting a smaller battery, my advice is don’t be too cautious. You only get one use of the federal battery rebate per property, as well as one NSW VPP incentive. You don’t want to blow them on a small battery and wind up realising you should have gone bigger. If you do make a mistake in the other direction and get a battery that’s a little larger than you need, then that will make it more capable of providing backup power, and it’s also likely to last longer and lose capacity at a lower rate because it will be used at a lower capacity factor. You might miss the “financial sweetspot”, but that’s not likely to be a disaster.

Unless you’re me. For me, disaster is definitely on the cards. While I think I’ve done a good job of estimating what size battery my sister should get, I only put my personal odds of survival at around 80%. If she makes me decide which VPP she should join, then I probably won’t be of much further use to her after that, so my odds will probably drop to around 50/50.