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With increasing questions from our community and growing industry discussions around battery storage contract structures, we’re seeing significant interest in understanding tolling agreements for Battery Energy Storage Systems (BESS). Here’s an explainer as more developers seek clarity on how they work.
A tolling agreement is where simplicity meets security. Most battery owners step back from active market participation, instead receiving guaranteed fixed payments while the whole risk is covered by the service provider (or optimizer) who is offering the tolling agreement. This arrangement is the inverse of merchant or profit-share contract structures (where owners take on market revenue risk). However, some battery owners prefer to remain involved in trading – both options are possible.
Tolling agreements are valuable in a fluctuating market
Typically, utilities, energy traders, and large power consumers commit to purchasing and controlling the battery’s energy output. They look to make a profit by optimising the battery’s operation to achieve earnings above the agreed-upon flat rate. It’s an arrangement that can provide a comforting sense of stability in an otherwise volatile market.
This is particularly valuable considering how dramatically storage revenues can fluctuate – as they did for the Electric Reliability Council of Texas (ERCOT), for example. Revenues in 2024 dropped 73% compared to 2023, and in 2021 soared to ten times the historical average due to winter storms. The energy markets in the UK, Italy, and Germany during 2024 also showed volatility.
- In the UK, energy prices followed a rollercoaster pattern, showing how regulated markets still experience significant fluctuations.
- Italy faced an unstable electricity market in 2024, with prices averaging 109 euros per MWh – 50% above neighbouring countries. While prices peaked at 136.72 euros per MWh in November, regions like Sicily and Sardinia experienced periods of zero-price clearing. This volatility led major energy buyers to delay long-term power purchase agreements (PPAs), with more price fluctuations expected as the TIDE system introduces negative pricing.
- Germany’s market also showed remarkable volatility, with electricity prices reaching 86.29 euros per megawatt-hour in October 2024, and experiencing a record-breaking 460 hours of negative prices throughout the year.
Investors are therefore keen to enjoy tolling agreements because of these benefits:
- Risk management: They provide asset owners with predictable revenue streams, independent of the commercial result achieved by the service provider, who is usually in a better position to manage market risk.
- Financial security: Investors and lenders prefer this stable and predictable approach. For battery storage operators, it’s a quicker route to market with lower upfront capital requirements, whilst guaranteed payments help secure project financing and provide stable returns for asset owners.
- Trading optimisation: Transferring control to experienced trading specialists can offer more sophisticated market participation and improved asset performance.
How do tolling agreements work?
It’s a straightforward exchange, similar to a long-term rental contract. Each party focuses on their respective strengths – technical asset management for owners and market optimisation for service providers.
- The asset owner receives guaranteed fixed payments.
- The optimizer gets full control of battery trading operations.
- The optimizer profits from any value captured above the toll level through trading.
Contrast this with merchant or profit-share structures, where owners take on market risks for potentially higher returns. Or floor agreements, where owners get guaranteed minimum payments while still keeping some opportunity for increased profits during favourable market conditions.
Tolling vs PPAs
Like traditional Power Purchase Agreements (PPAs), these agreements provide asset owners with predictable, guaranteed revenue streams that enhance project bankability and simplify financing decisions. However, tolling agreements go a step further by completely separating asset ownership from operational control, allowing specialized trading entities to optimize market participation while owners focus on technical asset management.
PPAs often span the entire project lifetime, making tolling agreements generally shorter in comparison. In Europe they typically range from two to seven years, with recent industry trends showing a shift towards longer-term arrangements. For example, the seven-year tolling agreement between Shell Energy Europe and BW ESS/Penso Power for the Bramley Battery Energy Storage System in Hampshire, is one of the first long-term tolling agreements in Great Britain.
Looking ahead
The trend in Europe’s BESS tolling agreements is expected to accelerate through 2025, with the Nordic and Central European markets gradually moving away from purely merchant models. However, the approach varies significantly by country – while some Nordic markets remain predominantly merchant-based, others are seeing increased adoption of hybrid models combining merchant and contracted revenues.
In Finland and Sweden, asset owners still favour merchant approaches but, due to financing and bankability requirements, are increasingly exploring toll pricing models, and floor pricing models that guarantee minimum revenue levels while still allowing owners to earn additional profits when market conditions are favourable. Germany has plans to expand from 1.4 GW to 10 GW by 2030, combining merchant revenues with balancing services.
Across Europe, contracted revenue streams are taking different forms. Greece has already completed two energy storage tenders in late 2023 and early 2024, while Hungary, Spain, Belgium and Poland have held capacity market auctions. Italy has opted for a more regulated approach through MACSE tenders managed by Terna, aiming to reach 71 GWh of storage by 2030. Recognising the limitations of current support mechanisms, the European Commission is proposing a Europe-wide flexibility support scheme to accelerate the transition to contracted revenues.
As these varied approaches unfold across Europe, we’re seeing the creation of a more sophisticated, flexible and stable foundation for the future of energy storage.
