Passive Income, Operated Income: The Capture-Fraction Question

• 60%60%break-even capture fraction (modelled)

One plan pays you for doing nothing. The other pays you for being right about tomorrow, every day, indefinitely. The gap between them is a single number, and it’s probably smaller than you think.

Think of two ways to hold the same money. A savings account: a set rate, no attention, modest but near-certain. Or a portfolio you manage yourself: a higher ceiling, the chance of doing well, and the catch that the return depends on how good you are. You can beat the savings account handsomely. You can also misjudge things often enough to end up behind the boring option you could have had for no effort.

Electricity plans for a battery household split along exactly that line. This post is about the number that decides which side you land on.

Two kinds of asset

A fixed free-window plan, which gives a household a block of cheap or free electricity at the same hours every day, is the savings account. The savings are modest and nearly certain, and they arrive whether you pay attention or not. You reach the ceiling by default, just by being signed up.

A wholesale pass-through plan is the other kind. The price the household pays, and is paid, follows the live wholesale price, which moves all day. It’s sometimes very cheap and occasionally very dear. Pair that with a battery that can be told when to charge and when to sell, and you have an operated asset: the managed portfolio. The ceiling is much higher, because a battery that buys low and sells high across a volatile price can earn far more than any fixed window allows. But that ceiling is theoretical. What you bank depends on how well the thing is operated, and here that means an automated battery deciding what to do from tomorrow’s forecast.

The question this post asks is how good an operator that automation really is, measured, not assumed.

Why theory and reality part company

The theoretical value is what you’d bank if every decision were perfect: every cheap hour caught, every expensive hour sold into, every forecast right. Nobody banks that, and the reasons are mundane.

Forecasts miss. The cheap window you charged for never materialises, or the expensive evening you saved the battery for fizzles. The automation hesitates: when the forecast is uncertain the safe move and the optimal move aren’t the same, and play it safe and you leave money on the table, play it bold and a wrong forecast costs you. And life intervenes. The battery starts a clever evening half-empty because the afternoon ran the air-conditioning hard, or you’re away for a fortnight and the routine drifts. None of these is a malfunction. They’re the friction between a plan that works on paper and a household that exists in time.

Add it up and you get a fraction. The capture fraction is the share of the theoretically available value that the forecasting and automation actually bank. Capture everything and it’s one hundred per cent, which never happens. Capture nothing beyond what a passive plan would have given you and it’s effectively zero. Real households live in between.

The number that decides it

The passive plan is a flat line: the same value every year, because that’s what passive means. The operated plan is a sloped line, low when you capture little and climbing, eventually, well past anything the passive plan can reach. The question is where they cross.

For this household, by its own modelling, they cross at a capture fraction of about 60 per cent.

That falls out of the same model the last four posts have been building. The operated plan’s ceiling already has the battery’s wear toll subtracted from every trade, so it is what’s left after the battery has been paid for its trouble.

Below 60 per cent, the clever plan banks less than the boring one. A household capturing under that would have been better off on the simple plan that asks nothing of it. Above that, the operated plan starts paying for the complexity it demands. Sixty per cent isn’t a law of nature; a different house would cross somewhere else. But you don’t need to be a perfect operator to win, but you do need to be a fairly good one, which is a higher bar than the headline ceiling makes it feel.

With invented round numbers, not this house’s: say the passive plan reliably saves three hundred dollars a year, and the operated plan’s perfect-operator ceiling is six hundred. At full capture the operated plan is worth twice the passive one. At half capture it’s worth three hundred, a dead heat. A little over half and you’ve nosed ahead; a little under and the savings account quietly won.

Ceiling and floor

The two plans also differ in how sure you can be of getting the value. The passive plan is a narrow band of outcomes: best and worst case are close together, because nothing depends on you. The operated plan is a wide band. Its ceiling is far above the passive plan’s, but its floor is below it, and where you land is set by your capture fraction. Run it well and you’re near the top. Run it badly and you’re beneath the passive plan you could have had for no effort.

The managed option isn’t “the same but better”. It’s a small sure thing traded for a larger, less sure one, where the difference rides on how well you, specifically, will operate it.

How good an operator are you?

The instinctive question is “which plan is better?” It has no answer, because the operated plan is better above the crossing point and worse below it, and the brochure can’t tell you which side you’re on. The answerable question is how good an operator you are, measured, not imagined.

It is easy to assume you’ll capture most of the value, because the plan looks clever and the ceiling is the first thing you notice. Assumption is free and flattering. But the capture fraction is something you find out, by running the strategy and comparing what it banked against what a perfect operator would have banked over the same period. That comparison is the whole game, and until you’ve done it you don’t have a capture fraction, you have a hope.

So measure first, believe second. Run the operated strategy, or a back-of-envelope model of it, against a season of real prices, see what share it actually captured, then hold that up against the break-even. In this house the break-even was about 60 per cent, and the question that decided the plan was whether the measured capture cleared it, not whether the ceiling was tempting. It usually is tempting. That’s rather the problem.

Complexity is also its own cost, and it never shows up next to the ceiling. The operated plan asks for attention and tolerance of error, and the odd day when the call is wrong and you watch the simpler plan sail on. That is paid in time and nerve, not dollars, and a passive plan charges none of it. So the operated plan has to clear the break-even by enough to be worth the bother, and every household draws that line somewhere different.

What this leaves us with

The passive plan is modest, certain, indifferent to how clever you are, and quietly hard to beat. The operated plan has a far higher ceiling, a lower floor, and a realised value that scales with one number, the capture fraction. For this house the two break even at about 60 per cent. Below that, all the cleverness loses to the boring option. Above it, the cleverness earns its keep.

Chart to come

The honest switching question isn’t “which plan is cleverer?” but “how good an operator am I, measured against what perfect would have banked?” The headline ceiling tells you what the operated plan could be worth. Only your measured capture fraction tells you what it will be worth to you. Mistake the first for the second and you’ll sign up for a worse outcome than the savings account you walked past on the way in.

The spreadsheet doesn’t care what you hoped the answer was.