I am using 2 dry batteries for my backup UPS. For some reason the plastic around one of the terminals of a battery is melting and producing a lot of smell. Most of the times it works fine but at some odd days, whenever we put load on the batteries/UPS, it starts melting. I have replaced the whole wire/clip around that specific terminal but to no avail. I do not see any spark and all the connections seem fine. The wire also gets very hot but that's due to the heat obviously. How can I debug the issue?
This problem is an indication of resistance near or on the battery contact. When there is resistance present, any current through the connection will be converted to heat.
As you described, when you put a load on the UPS, it starts to melt. The load is the increased current that flows through the connection.
Try cleaning the connections, making sure any hardware such as clamps and screws are very tight, and making sure that any wires are firmly attached to the hardware and not coming loose.
Based on the picture you added to your question, I would make sure the battery post is very clean, that the crimping of the ring connector is very tight - it does not look so in the picture (perhaps solder it as well), and you may wish to consider adding a flat washer with a star washer underneath it, immediately on top of the ring connector. This will help with the electrical connection.
Also make certain that your UPS is not drawing more current from the battery than its rating.
All batteries are rated in Volts and Ah, yet we know they also have 2 fundamental properties of C and ESR with some dead or threshold voltage where the capacitance is fairly uniform between 90% SoC and 10% SoC. Where C is in the ten thousands of Farads units of measure and ESR is in micro-ohms . THere are also secondary C2,ESR2 values which cause a memory effect, but we can neglect these for now. Thus you NEED the contact resistance to be <1% of the battery ESR to be efficient and cool.
i.e. a 10 mOhm contact won't cut it.
The photo changes the question. Energy flows away from the hot spot.
It appears to me that the hottest spot at the crimps and melting the wire insulation above and conducting via the battery terminal to melt the battery block insulation around the electrode.
Avoid smelling the toxic fumes from PVC jacket or any plastic for that matter.
The wire contact resistance may be measured in millivolts if 10 Amps supplied or or some measured current is supplied. V/I=ESR and ought to be less than 100 mV at max expected current thus obtaining 100mV/Imax= ESR.
The reason they get hot is due to lack of air sealing around the copper terminal interface which causes oxidation. Try a better crimping tool or strip , crimp and solder the connection to make it air tight using a propane torch , then connect to battery. The crimp connector ought to be copper plated steel. or lead and not just steel for high compression strength and skin conductance.
These look to be sealed lead acid batteries with a vent hole, NOT DRY batteries. CCA about 800A~1000A with 0.1V drop max implies a contact resistance needed to be 100mV/1kA = 1 microhm... so you better flood the joint with solder inside clean copper and to connector ( if using the same poor quality terminal connectors.)
Then the terminal interface resistance needs to be tested with a rated current for power loss or voltage drop.
You can measure this at any time when hot using a DMM between post under the lug to any part of the wire/ crimp and spade lug.. THis can measure the fault resistance in mV/I of each contact interface.