battery storage
BESS dimensions: duration, cycles and warranty terms
All you need to know about battery sizing, cycles, duration and asset degradation to ensure a profitable trading performance.
Storage specialist Andras Molnar weighs in on the different types of contracts that carry relevance for the optimization of battery systems.
Contracts, especially long-term contracts, for battery energy storage systems (BESS) can be somewhat of a mystery because there is very little accessible information on them. Exchanges with customers have made it all the clearer that tolling agreements, floor prices and PPAs often cause confusion, especially in relation to short-term trading arrangements. Of course, contracts are highly unique in their outlines due to asset specifications and negotiated clauses, but you can consult example 1 and example 2 for reference. This article explores tolling agreements and floor prices for battery systems in an interview with storage specialist Andras Molnar.
Andras has more than 10 years of experience in the energy industry and is trained in different roles from TSO and power plant operation to asset optimization and development. At enspired, he specializes in commercial solutions for battery storage assets on various markets.
What are tolling agreements for battery energy storage systems (BESS)?
A classic tolling agreement is a long-term rental contract between a toller (seller) and an offtaker (renter). The toller owns and operates the power generation unit, typically a gas-fired one, while the offtaker pays an agreed-upon “rent” and supplies fuel to convert it into electricity. This entitles the offtaker to exert control over the operation of the power generation unit, whereas the toller has limited, if any, privileges in this regard. Historically, tolling agreements were gas conversion use cases, where renters had natural gas but needed power. The solution was to rent the necessary infrastructure from a power plant owner in exchange for a fixed tolling charge. Basically, the offtaker owns the energy in the rented asset and can therefore use it as desired and put usage limitations on the toller.
How does this concept translate to battery tolling agreements?
Tolling agreements became relevant for batteries due to two factors. One was the fundamentally changing landscape of the energy industry: vertically integrated, government-owned companies spun off, and separate entities started focusing on specific parts of the value chain. Secondly, some of these companies had access to one commodity while they were in need of another and had to find a commercial model that could mitigate their risk.
Today’s energy landscape is different again and still changing rapidly, especially when it comes to batteries. There is a diverse range of players on the market: project developers, financial investors, operators who do not own the asset and optimizers without a consumer portfolio to supply. While these companies have the same interests as a classic toller or offtaker, they employ different means of evaluating real options in the markets and allocating risks. Due to the nature of BESS revenue streams, long-term predictions are typically not reliable enough for offtakers to handle the risk profiles a classic tolling agreement brings to the table.
What are the pros and cons of a battery tolling agreement?
When it comes to pros and cons, we need to distinguish between the two parties involved in a tolling agreement. The biggest advantage for the toller is the fixed income – in the right setup across the different contracts attached to an asset, it can mean a good profit. The biggest disadvantage is being responsible for maintenance and availability while having restricted to no influence on the operational regime and very limited upside potential from the markets. As for the offtakers, their greatest benefit lies in being able to use the asset without having to deal with the complexities that go into its maintenance. Offtakers also profit from a limited downside potential due to their ability to control the power generation unit in negative spark environments. At the same time, offtakers accept a certain degree of market risk as the achieved revenues could prove insufficiently lucrative. Tolling charges should not be underestimated.
Summing up for the toller
+ fixed fee regardless of commercial results
- responsibility for the technical setup and all administrative aspects
- no authority over asset use
Summing up for the offtaker
+ authority over how the asset is operated (for ancillary services, wholesales etc)
+ mitigated risk across critical project areas (development, commissioning, round trip efficiency, maintenance, operation etc)
- responsibility to supply fuel to the asset
- obligation to pay the tolling fee even if the asset commercially underperforms
What is the alternative to a battery tolling agreement for the offtaker?
If you are in need of a battery or its capacity, your only alternatives to a tolling agreement are acquiring your own asset or making use of a battery-as-a-service offer. The latter differs slightly from a tolling agreement, but the principles are the same: you pay a fee to have a battery or other type of storage at your disposal. The offtaker in such a scenario is typically an industrial player with the goal to improve the reliability of site supply or manage imbalance risks with power. Thermal storage units are commonly used for this.
What is the alternative to a battery tolling agreement for the toller?
If you want to make money off your asset, you have the option to go through a route-to-market provider, with or without a floor price in the contract. That way, your battery or a portion of its capacity can go straight to the markets and access a diversity of revenue streams. A route-to-market provider can also help offtakers to make the most of their rented asset.
How does floor pricing for batteries work?
A floor or minimum price constitutes guaranteed revenue storage owners make off their asset when going through a route-to-market provider. The amount is contractually fixed before the battery hits the markets, although the sum can be set as variable under certain circumstances. While battery operators with a floor price in the trading agreement are guaranteed a minimum gain, their overall revenue split is lower because the market risk gets transferred to the trading party. Agreements containing a floor price typically have shorter tenors as the risk for the trading party increases with longer durations of fixed revenues.
Is it recommended to have a floor price?
It all boils down to revenue potential versus risk mitigation in the end. Let’s illustrate this with an example based on a profit-share partnership. If the contract states a floor price of 80k/month, and the battery brings in 70k, the owner still makes the agreed-upon 80k. However, the revenue split between owner and trader in the same contract would be, say, 70:30 instead of 85:15. This means that if the battery makes 150k, the owner will receive 105k, the 70% share. Without a floor price, the owner’s total revenue would have been 127.5k, the 85% split of the revenue. Most investors and owners typically focus on the potential risks of their projects and pay less attention to the potential upsides. Their requirements depend on their financing structure, understanding of the power markets and in-house capability of risk management. Overall, a potential floor is attractive enough in the market, but due to the above-mentioned reasons, not commonly offered by route-to-market providers.
How does a PPA (Power Purchase Agreement), another common type of contract, compare to tolling agreements and floor prices?
A tolling agreement is about asset rental; a route-to-market contract with floor pricing regulates minimum revenue for the asset owner. In both cases, the offtaker is interested in the capacity, the flexibility, the real option value of the asset and accepts the associated market risk. PPAs are different. They are not about renting the asset, but about trading an agreed volume at a pre-defined price over an extended period of time. The fixed price and volume mitigate market exposure for both the seller and the offtaker, thereby helping to finance projects and plan the supply of consumption portfolios. These structures handle different sets of risks, and beyond the volumes and price, they are all about the best possible risk allocation between the parties.
Offtaker demand for pay-as-produced PPAs is decreasing; therefore, sellers need to work on handling profile and imbalance risks as well as delivering 24/7 or baseload PPAs. For these, the seller might choose to co-locate solar stations with a battery in order to battle renewable volatility and ensure a steady supply. Having a storage unit installed mitigates the imbalance risk because you can charge and discharge the battery in alignment with the baseload profile, which drives up the value of the PPA.
What role can a short-term trading specialist take in a long-term contract situation such as with a PPA?
A trading partner can support either party of the contract (offtaker or seller) depending on what responsibilities and risk profiles they have in their contracts. A company like enspired contributes to your revenues by exploiting residual or unutilized flexibility on short-term power markets and optimizing it through available revenue streams. If you are a PPA seller and responsible for delivering a specific profile or even a baseload PPA in a hybrid setup, we can also help manage your profile risk through continuous intraday trading.
For further reading, the World Bank published a report on the Guidelines for Implementing Battery Energy Storage Systems under Public-Private Partnership Structures in January 2023.
