‘Merchant will keep the most upside’: Europe’s move to tolling agreements for battery storage in focus

It recently took the bold decision to enter into a two-year tolling deal with utility Octopus Energy, whereby Octopus will pay it a fixed fee and take on operation and revenues for around half of GRID’s portfolio, totalling 568MW/910MWh.

The deal is a stark departure from the ‘merchant’ model which has dominated until now, where project owners typically (though not always) contract with another company that trades the BESS in the market, and revenues and risks are shared between parties.

Energy-Storage.news interviewed Octopus’ head of flexibility Kieron Stopforth about its rationale for the deal shortly after, and recently caught up with Gresham House’s New Energy assistant fund manager James Bustin about its side of the deal, including how the idea came around in the first place.

“It was based on a revenue trial on a single project, around being able to balance supply and demand contracts. The BESS is fundamentally about balancing supply and demand, and we were trying to demonstrate that on a small basis, so used a single portion of a site,” he said.

“BESS demonstrated a lot of value and we weren’t seeing that with the ESO (the UK’s electricity market operator) at the time. We saw an opportunity there and talked to multiple parties about it. Some were keen, some weren’t so keen, and we landed on Octopus. It’s very renewables-focused and that links well with BESS.”

Ben Guest, managing director New Energy for Gresham House, said in market analytics firm Modo Energy’s Transmission podcast recently that the company had looked at toll deals in the past, but that their revenues were so much lower than even the worst-case merchant scenario. Since then, market revenues have plummeted, making such deals more attractive.

One question is what deals like this, and others that may follow, will mean for third-party optimisation companies, many of which are small outfits and startups that might not be able to offer the scale and guarantees that Octopus can.

“We built this out from a smaller trial and we see it as something that can be done across the optimiser market,” Bustin said.

“This woke up the wider market to the possibility of this being an option, it’s not only for large suppliers, though a large supplier has benefits like a balanced portfolio.”

Watch (or just listen to) Modo CEO Quentin Scrimshire’s discussion with Ben Guest from 4 July on Modo’s podcast in full here.

Optimisers: industry moving to tolls but merchant will remain – and provide best returns

The rest of Europe has taken note and optimisers Capalo AI and Flower, both mainly active in the Nordics, told Energy-Storage.news that we will see more deals of this type in the future. Both say that the merchant model will however remain.

“The Nordic BESS market is maturing, and as a result, more asset owners are starting to ask about toll or floor pricing models. The biggest reason is project financing and ‘bankability’; creditors want to see stable, fixed revenues, and tolling is the way to provide it for batteries,” Capalo’s CEO Henri Taskinen said, adding that potential market saturation of ancillary services is a growing concern, which tolling can hedge against.

“However, the Finnish and Swedish markets are still almost purely merchant-based, and not many players are prepared to commit to tolling yet. We believe there will be takers and providers for tolling in the future, but different strategies will also be diverse between asset owners and traders. At the bottom of it, the most comprehensive optimisation will be essential, whether it’s tolling or merchant.”

“For the Central European region, we believe a similar shift as in the UK is happening. There will be more tolling agreements and longer-term contracts, but we don’t believe the merchant model is still fading away.”

The company recently landed a deal to optimise a 38.5MW BESS in Finland for project owner eNordic (the local fund manager for private equity firm Ardian).

Flower CEO John Diklev meanwhile has been very vocal about the need for evolutions in contracting structures in BESS optimisation, particularly around making agreements more long-term. To this end the firm acquired its first BESS project, a 42.5MW system in Sweden from developer OX2, in April.

Diklev said the move to finding more foreseeable cash flows is a natural part of the scaling up of the industry and the need for optimisation to enable efficient capital structures, but merchant will always have the potential for higher returns.

“Capacity mechanisms, tolling agreements and other long term solutions will ensure sufficient DSCRs (debt service coverage ratios) and perhaps a decent return on equity, but the merchant share left will provide the greater upside.”

“The UK is currently ahead of Northern Europe’s current status of essentially merchant-only contracts, and is providing a sound path forward.”