‘Balance between profitability and predictability’: inside Europe’s shift towards tolling offtake agreements in battery storage

“When everything started here in the UK, the market was very early, compared to the financing part,” she continued. “We chose the route to market [three years ago] because the banks had to cope with the merchant approach. The rest of continental Europe, learning from the experience of the UK market, came up with a more financeable product, which is the tolling agreement.”

“Battery owners themselves want some certainty of revenue, so they can create a project that they know is viable and use that capital subsequently for further developments,” added Mark Meyrick, general manager at UK-based route to market platform Smart Grid, who said that balancing risk and reward between the various parties is a more compelling explanation for the growth of tolling agreements than the “easy narrative” that banks are interested in tolling arrangements.

“It really is about working out between the owner and the toller an acceptable risk-return,” he said.

The benefits of this ability to balance risk and return across various parties were echoed by Isabel Rodriguez, managing director of investment manager Nuveen Global, who said that this flexibility has made tolling structures particularly attractive for potential investors.

“There is a balance between profitability and predictability,” she said. “We all need profitability, and ironically, we need the volatility that we’ll have in the early years. Tolling structures are a tool for two things: predictability and profitability.”

Does appetite for floor arrangements remain?

However, the panellists agreed that tolling arrangements in Europe have not, and should not, replace older offtake agreement structures, such as floor arrangements. Indeed, Rodriguez said that investors are keen to “have an asset that is functioning and involved in a second market,” once a tolling agreement comes to an end, rather than focus entirely on the duration of the deal.

“This is also why the drive back to floors and other mixes between toll and merchant is coming back into the market, because not only do we care that the toller will act with the asset as if it’s its own, but we also care about the exposure to merchant revenue,” added As, who suggested that agreements like floor arrangements encourage greater and closer collaboration between the parties involved. This kind of close attention paid to a battery asset is particularly important, considering its role as a way of generating revenue from a market that can be unpredictable, and needs constant attention.

“Why would someone invest in a flexible asset without having an interest in its flexibility?” she asked. “We’re seeing floors or floors with caps … especially with hybrid and co-located assets.”

Indeed, Meyrick said that he “likes” floor-plus-upside arrangements “better” than tolling agreements, specifically because it “keeps the owner invested in seeing what’s going on with the asset.”

“The things that we really think about when we’re structuring these contracts is availability [which is] absolutely key, and with the owner, you need to make sure you’re on the same page,” he added. “We want the asset owner to feel that they’re in a partnership and be really interested in the performance, rather than think ‘I get my toll and I get my asset back at the end of it’”.

Ultimately, this kind of flexible approach, where asset managers and investors decide on offtake structures on a case-by-case basis, could be the most common in the long-term. Meyrick said that “it is my feeling” that more merchant offtake agreements will become common again in the future, while Jacob Lloyd, managing director and specialist in asset and battery storage finance at Natwest, said that in the last year, his band had invested in deals where “half of it’s tolled off, half of it isn’t,” painting a more nuanced picture of Europe’s storage offtake landscape.