A Pexapark viewpoint
My journey with offtake agreements for battery energy storage systems (BESS) began in 2018, during the pivotal period between the award of contracts for enhanced frequency response (EFR) and the launch of Dynamic Containment (DC), two TSO ‘ancillary services’ that helped to put BESS on the map in the UK. At that time, and for the next few years, the BESS optimiser landscape was made up of a handful of innovative companies, a well-known automaker and some utility early adopters. Offtake agreements reflected these market dynamics, often based on ancillary service-led merchant business cases with robust margins.
Fast forward to today, as I compare my day-to-day as BESS Lead in Pexapark’s Advisory team, the picture is markedly different but no less exciting.
The BESS optimiser market in the UK has significantly expanded and diversified, with many of the early adopters now managing large BESS portfolios or exploring new business models, and examples of start-ups and utility players from Europe, banks and trading houses all offering services – often using the same software platforms. Germany has also caught up quickly, with a deep pool of optimiser service providers also featuring several utilities and smaller companies using platforms built around algorithmic trading and dispatch. The agreement between Obton, Entelios and Enspired (see slide below) is one example of what appears to be a recent merchant deal but is one that leverages expertise from two optimisers to maximise the value of the BESS in the renewable portfolio. Markets like Italy, Spain, Poland and the Netherlands are also seeing rapid growth, with many of the same optimisers are offering services across these regions.
Market maturation in the UK: Increased competition and evolving agreement structures
For merchant BESS offtake agreements, the increased competition in the UK led to a predictable reduction in optimiser margins. Pexapark has also seen increasing levels of flexibility around key commercial terms like termination rights, particularly as less established market players seek ways to offset shortfalls such as a lack of track record. Outside of the UK, there are examples of very short merchant agreements in Germany, pointing to a ‘test and learn’ type approach to optimiser engagement.
Merchant-focused agreements have progressed to include floor prices offering downside protection, and full ‘tolling’ type structures have emerged, where the optimiser pays a fee per MW or MWh for use of the asset according to agreed terms and benefits from the majority of resultant revenues (Capacity Market payments are often excluded). This evolution is supportive of:
- More widespread use of debt finance as the shift to investment in bigger assets with longer durations continues, though there are examples of banks lending to merchant projects in the UK and Germany
- Greater flexibility to manage portfolio-level risk, as evidenced through the use of tolling to achieve a 2-year fixed price for 50% of a BESS portfolio in the agreement between Gresham House and Octopus in the UK (see graph attached).
Work by Pexapark suggests good liquidity for these structures in the UK, evidenced by the number of parties willing to offer floors and tolls for different tenors on a recent project, whilst the spread between individual floor and toll offers point to either differences in pricing approaches or in risk appetite. In addition, smaller players look to be utilising partnership approaches, presumably to manage challenges around balance sheet or lease liability.
Tolling levels offered in Germany are higher, reflecting the differences in current market opportunity, but there appears to be a mismatch between developer expectation and optimiser pricing. In Italy, some optimisers are looking to offer tolling for assets that can’t or won’t seek to secure contracts under MACSE, although managing Capacity Market participation is more challenging in these contracts than in the UK.
When transacting, benchmarking approaches need careful consideration with floor prices for BESS given the typically longer terms. For floors and tolling agreements, credit support, re-opener terms, termination payments and clarity on how to quantify the impact of availability, degradation and round-trip efficiency on the quantum of the floor price or fixed payment are key to successful negotiation of agreements.
Hybrid agreements and structures to mitigate negative price risks
Beyond traditional structures like floor prices and tolling, innovation continues in BESS offtake agreements. Hedging products such as financial swaps in Spain,virtual BESS in the UK and so called ‘Power Storage Agreements’ in Germany are gaining traction (usually involving variations of a fixed payment in return for the ability to nominate charge/discharge cycles indexed to a reference price). An agreement reported in late 2024 between Iqony and Deutsche Bahn that I’d expect to pave the way for similar deals looks to be an extension of this to include carbon reduction benefits, and also involves partitioning the asset such that 15MW remains with Iqony. As with tolling agreements, alignment on approaches to pricing these structures will be key to transacting.
In addition, recent work with clients in collaboration with leading law firms in Europe has covered hybrid merchant/tolling and hybrid BESS offtake/PPA agreements. Hybrid PPAs with co-located BESS are of particular interest to many market participants currently due to the ability to mitigate PPA price cannibalisation risk. By valuing the PPA uplift, part of the BESS revenue can be hybridised into the PPA—an increasingly important approach as negative prices impact markets like Germany and Spain and one that appears to have been well demonstrated in the corporate PPA signed between Orange France and E Energy in France (see graph).
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