Floor and tolling models: optimizing BESS profitability in volatile markets
The role of battery energy storage systems (BESS) is becoming increasingly important for stabilizing power grids and optimizing energy use as part of the energy transition. With the integration of renewable energies such as wind and solar power, the need for efficient energy storage solutions continues to grow. In Germany, BESS systems have shown remarkable profitability in 2023, generating revenues of around €250,000/MW (2-hour systems, 2 cycles per day). This profitability is boosted by factors such as the expansion of solar capacity, extreme weather events and geopolitical disruptions, which contribute to increased market volatility.
The growing number of battery storage systems has led to the development of various financing and revenue models aimed at promoting investment while managing the risks of volatile energy market prices. In this context, ESFORIN has established itself as a pioneer of battery-related flexibility marketing in the various relevant markets and offers innovative risk-sharing models to ensure financial security for BESS developers and operators.
Understanding Battery Energy Storage (BESS) financing models
Due to the fluctuating energy markets, BESS projects require flexible and innovative financing structures. These models are designed to reconcile financial security with market opportunities and enable plant operators and investors to manage risks effectively. The following three main structures have emerged:
- Merchant: This structure is based on a predetermined profit distribution between the BESS operator and the marketer. Both parties share the risks and rewards of the market performance, which provides the operators with a stable source of income and at the same time gives them the opportunity to generate additional profits in the event of market upturns.
- Floor: With the floor model, the BESS operator is guaranteed a minimum turnover that provides security in volatile markets. Profits that exceed this guaranteed threshold are shared between the marketer and the operator. This model is suitable for those who want to reduce risk but still want to participate in potential market profits.
- Tolling: In tolling agreements, the BESS operator leases the plant to the marketer, who assumes full operational responsibility and the market risk. In return, the operator receives a fixed, guaranteed income. This model is ideal for investors looking for security, as it offers stable income and the market potential is solely in the hands of the operator.
Fig. 1 BESS Pricing Models
Deep Dive: Floor models
The floor model is becoming increasingly important as an attractive option for BESS financing. In this model, a floor is agreed between a third-party financier and the system operator, which is typically structured as a fixed-for-floating swap. The financier guarantees a fixed payment based, for example, on the forecast spreads of the day-ahead market, while the operator pays the actual realized spreads of the day-ahead market back to the financier.
This agreement usually extends over a certain period of time, often up to five years. It provides the operator with a predictable monthly income derived from the spreads of the day-ahead market. The floor amount is calculated on the basis of the monthly market results, and the daily amounts are settled together at the end of the month. By marketing purely on the day-ahead market, the operator can secure the floor amount and create a stable financial basis.
Fig. 2 "Floor" price model
The major advantage of this model is its flexibility. As it is a purely financial instrument, there are no restrictions on marketing the system in day-to-day business. Operators and marketers are free to optimize in the intraday or balancing energy markets in order to increase the value. Marketing in the day-ahead market typically only accounts for around a third of the potential revenue from cross-market marketing, which opens up considerable revenue potential in the additional markets. Experienced cross-market marketers will usually outperform a pure day-ahead strategy. This floor model therefore offers a promising opportunity for plant operators to secure a fixed income and at the same time tap into further potential through broader market participation.
Which financing model is best suited to my battery storage system?
Choosing the right financing structure for your battery energy storage system (BESS) depends on your project's risk tolerance and financial strategy. Each model offers a different level of security, market exposure and return potential, allowing system operators to align their investment approach with their long-term goals.
- Merchant: This option is ideal if you have confidence in a stable or positive development of battery storage revenues, especially with increasing market volatility and growing spreads in the day-ahead market. It is suitable for those who prioritize profit maximization and do not require additional collateral for BESS financing.
- Floor: This model is the right choice if you expect reduced volatility and possibly decreasing spreads in the day-ahead market in the coming years. A key advantage of the floor structure is its attractiveness to investors, as it guarantees a fixed return and makes it easier to finance your BESS project with higher leverage. Floor payments provide a safety net but still leave room for upside.
- Tolling: This option offers guaranteed payments with no market volatility, making it ideal for risk-averse investors. It is designed for those who value security, need full protection against downside risk and are not looking for additional value.
Regardless of which financing model you choose, ESFORIN will maximize the returns on your investments across all markets and offers a one-stop solution for optimizing your energy storage. Want to learn more about the different BESS financing models and find the right option for your project? Contact us at ESFORIN for expert advice and support!
