Time-of-Use Arbitrage: Sizing a Battery to Peak Rates

1. How Time-of-Use Rates Actually Pay a Battery Back

A time-of-use rate divides the day into price windows instead of charging one flat price. On-peak hours cost the most, usually weekday afternoons and evenings. Off-peak hours cost the least, usually late night and early morning. Some utilities add a super off-peak tier that is cheaper still.

The battery becomes a time machine for electricity. You charge it during cheap off-peak hours, then run the house from it during expensive peak hours. Every kWh you shift avoids the gap between the two prices. That gap is the spread, and the spread is the entire business model of arbitrage.

This is load shifting, and the goal is to avoid peak rates rather than to use less electricity overall. Total usage stays the same. The bill falls because the expensive hours no longer pull from the grid, and the cheap hours do the work instead.

A real example from buyer discussions shows how the numbers feel in practice. One homeowner listed peak rates of 33 cents from 1 to 6 PM, off-peak at 9 cents, and super off-peak at 6 cents. Shifting one peak kWh avoided roughly 27 cents. That is not a huge number per kWh, which is why spread size decides everything. A utility with a 6 cent spread cannot pay back a battery. A utility with a 30 cent spread can, if the math below works out.

The peak-shaving mechanism behind this is already covered in our overview of the advantages of battery energy storage systems. This article goes deeper into whether the savings actually cover the battery.

2. Reading Your Own Rate Schedule First

Before any shopping, pull your utility rate schedule. Most homes have no idea which tariff they are on, and the answer changes the whole decision. The schedule is usually one page on the utility website, and it lists the price windows and the cents per kWh for each.

Finding it takes five minutes. Log in to your utility account and open the rate or tariff page, or search your bill for the plan name printed near the usage summary. The plan name matters because utilities often offer several TOU tiers with different windows and prices. Confirm which one you are actually on before running any savings math.

Three things to look for:

• The peak window hours and whether they run on weekdays only.
• The spread between the cheapest and most expensive tier.
• Whether a demand charge exists on top of the energy charge.

The US Energy Information Administration tracks how many residential customers are enrolled in time-based rate programs, which shows how common these tariffs have become. You can read their explanation of time-of-use and dynamic pricing data to see what utilities report.

If your bill shows one flat price for every hour, arbitrage does not apply. You cannot buy low and sell high when every hour costs the same. That flat-tariff case is covered in our guide on how to choose a solar battery, where backup value becomes the main reason to buy.

3. The Arbitrage Math: Spread × Cycles × Efficiency

The full formula for annual savings is:

Run it with a 20 cent spread, a 13.5 kWh usable battery, 300 cycles, and 90% round-trip efficiency:

Change the spread to 8 cents and the same battery earns about 292 dollars per year. The spread is the lever that matters most, and it is completely outside your control. That is why the first question is never "which battery" but "what is my spread."

Why 300 cycles instead of 365? Most TOU plans price the peak window on weekdays only, and homes skip cycling on travel days or mild weeks. Building the year on 300 realistic cycles keeps the estimate honest. A battery that never skips a day earns slightly more, but the 300-day habit is the safer planning number.

Efficiency sits inside the formula because the battery loses energy every cycle. Charging 13.5 kWh of usable energy at 90% round-trip efficiency requires pulling about 15 kWh from the grid. You pay for the losses, so the delivered cost of the shifted kWh rises. Academic work on arbitrage under dynamic pricing confirms that operating strategy and efficiency, not battery size, drive most of the profit. A peer-reviewed study on operating strategies for small-scale battery arbitrage builds the same model with charge and discharge losses included.

4. Size to the Peak Window, Not to the Whole Day

The most common sizing mistake is matching the battery to total daily usage. You do not need to shift the whole day. You only need to cover the peak window, because that is the only period where the spread pays.

The peak window is typically 4 to 8 hours. Take the loads that run in that window and add them up. A home that draws 1.5 kW during a 4-hour peak window uses 6 kWh in that window. A 5 kWh usable battery covers most of it. The same home drawing 2.5 kW during an 8-hour window needs roughly 20 kWh usable.

A second constraint hides in the same numbers: power. The battery must deliver the window's peak draw at the same time it holds the window's energy. A 3 kW draw over 4 hours needs 12 kWh usable and a battery rated for at least 3 kW continuous. A big tank with a small tap fails the window just like a small tank with a big tap. Check both ratings against your window.

This is where our capacity calculation guide becomes useful, because it walks through matching usable energy to a load profile instead of guessing by home size. Size the battery to the window you can actually avoid.

EnergySage publishes typical peak and off-peak windows for major utilities, and their summary of off-peak hours is a good reference for what most utilities do. Windows vary by utility and season, so confirm yours on the schedule itself.

5. Round-Trip Efficiency and What It Costs You

Round-trip efficiency is the percentage of energy that comes out of the battery compared to what went in. LiFePO4 systems typically run around 90% to 95% at the battery level, before inverter losses. Every percent of loss is real money over 300 cycles a year.

The efficiency tax is easy to underestimate. On a 20 cent spread, a 10% round-trip loss quietly removes about 10% of your gross savings. That is why a battery advertised with a huge capacity but poor efficiency can lose to a smaller, tighter system on the same tariff.

Efficiency also matters at partial power. A battery pushed to its maximum discharge rate loses more to heat than one cycling at moderate power. If your peak window load forces the battery to run near its power limit, real delivered efficiency drops. Our 48 V lithium battery pack collection lists the continuous power ratings you need to check against your peak draw.

6. Demand Charges vs Energy Charges

An energy charge bills per kWh used. A demand charge bills per kW of peak power drawn, usually the highest 15-minute average in the billing month. They are separate line items, and a battery treats them differently.

Arbitrage attacks the energy charge by shifting kWh out of the peak window. A demand charge is attacked by shaving the single highest kW spike, even for 15 minutes. One method spreads savings across the whole month. The other depends on one or two moments.

Residential demand charges are still rare in most US markets but common for commercial accounts and in some regions. Check your bill for a demand line item before assuming you can shave it. If your tariff has one, the sizing logic changes: you size for the kW spike you need to cut, not the kWh window. That is a different calculation from arbitrage, and mixing the two leads to oversizing.

Under a demand charge, the battery is dispatched differently. It sits idle most of the day and discharges only in the 15-minute window where your draw would set the month's peak. That saves the demand fee without cycling the battery daily, which keeps degradation cost near zero. The two billing structures reward opposite habits, so a system sized for one is often wrong for the other.

For the energy-shifting case, the Moveable LiFePO4 battery  shows capacity options that fit a window-based design.

7. When Arbitrage Beats Backup — and Vice Versa

Buyers usually want both, but the two reasons pull in opposite directions. Backup value comes from having energy when the grid is down, which means running loads you cannot run from the grid. Arbitrage value comes from avoiding peak prices, which only exists while the grid is up.

A battery sized for backup is often larger than a battery sized for arbitrage, because backup covers multiple days of critical loads. A battery sized for arbitrage only covers the peak window each day. Buying for both means sizing for the larger of the two, and the extra capacity sits idle most of the year if arbitrage is the smaller number.

One buyer put it directly: their concern was power security, not lowering the bill, and "is it worth it" had no universal answer because the two goals price differently. If you mainly want outage coverage, our article on how long a 16 kWh battery can power a house uses the backup lens. If you mainly want bill savings, the arbitrage math in this article is your framework. Decide which one you are buying before you compare quotes.

8. Degradation Cost per Cycle: The Number Everyone Skips

Almost every arbitrage article stops at gross savings. The step everyone skips is subtracting the cost of wearing out the battery. A cycle is not free, and arbitrage deliberately cycles the battery far more than backup use.

The formula is simple: system price divided by guaranteed cycles gives the cost per full cycle. A 10 kWh system installed for 10,000 dollars with a 6,000-cycle warranty costs about 1.67 dollars per full cycle in wear. That number must come out of the spread savings before you call the arbitrage profitable.

On a 20 cent spread with 9 kWh usable and 90% efficiency, gross savings per cycle is about 1.62 dollars. Against a 1.67 dollar cycle cost, the battery barely breaks even. The same system on a 30 cent spread earns about 2.43 dollars per cycle, leaving roughly 0.75 dollars of real profit per cycle. The degradation cost is the reason a thin spread cannot pay back a battery no matter how clever the schedule.

Calendar aging runs alongside cycle aging. Cells lose capacity from time and temperature even when the battery sits idle. A battery used only for backup wears slowly, while a battery cycled daily for arbitrage spends its cycle budget quickly. Arbitrage converts a slow calendar cost into an active cycle cost, which is exactly why the cycle price must appear in the payback line.

LiFePO4 handles this better than most chemistries because cycle life is long. Quality cells are rated for 6,000 or more cycles, and our article on how long a lithium-ion battery lasts explains how cycle ratings translate into years. Depth of discharge also changes the math: cycling to a shallower limit per day extends cycle life, which our depth of discharge guide covers in detail. Two cycles per day sounds like double the savings, but it roughly halves the years of life, so the cycle-cost line rises twice as fast.

9. A Payback Walkthrough With Numbers

Put it together with one concrete example. Assume a 20 kWh rated battery, 90% DoD, so 18 kWh usable. Installed price at 1,000 dollars per kWh comes to about 20,000 dollars. The rate schedule has a 24 cent spread, off-peak at 8 cents and peak at 32 cents, and the peak window is 5 hours.

Step one, verify the window math. A 5-hour window at 2.5 kW average draw needs 12.5 kWh. The 18 kWh usable battery covers it with margin, so the window is the limit, not the battery.

Step two, calculate gross annual savings. 24 cents × 12.5 kWh shifted per day × 300 days × 90% efficiency equals about 810 dollars per year.

Step three, subtract cycle wear. System price 20,000 divided by 6,000 guaranteed cycles is about 3.33 dollars per full cycle. The battery does roughly 300 cycles a year, so wear runs about 1,000 dollars per year.

The wear cost actually exceeds the savings, so this system loses about 190 dollars per year on arbitrage alone. The battery only makes sense if backup value is added to the calculation, or if the spread is wider. A 35 cent spread flips the result. Gross savings land near 1,180 dollars, wear stays near 1,000 dollars, and the battery keeps about 180 dollars per year. Payback lands near 8 years before adding backup value. That is the honest range this decision lives in.

Spread, usable energy, and cycle life are the three numbers that decide it. Comparing sizes with real cost per kWh is easier with our 15 vs 20 vs 40 kWh comparison. A modular setup can also start smaller and expand if the tariff changes, which many wall-mounted units support. Wall-mount systems in our wall-mounted battery collection are built for that kind of staged expansion.

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