Floor and Tolling Models: Optimizing BESS Profitability in Volatile Markets
The role of battery energy storage systems (BESS) is becoming increasingly important in stabilizing power grids and optimizing energy use as part of the energy transition. With the integration of renewable energy sources such as wind and solar power, the demand for efficient energy storage solutions continues to grow. In Germany, BESS installations demonstrated remarkable profitability in 2023, generating revenues of approximately €250,000 per MW (2-hour systems, 2 cycles per day). This profitability is driven by factors such as the expansion of solar capacity, extreme weather events, and geopolitical disruptions, all of which contribute to increased market volatility.
The growing number of battery storage systems has led to the development of various financing and revenue models designed to promote investment while managing the risks associated with volatile energy market prices. In this context, ESFORIN has established itself as a pioneer in battery-related flexibility trading across 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 volatility of energy markets, BESS projects require flexible and innovative financing structures. These models are designed to balance 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-sharing arrangement between the BESS operator and the marketer. Both parties share the risks and returns associated with market performance, which provides operators with a stable source of income while also allowing them to generate additional profits during market upturns.
- Floor: Under the floor model, the BESS operator is guaranteed a minimum revenue, which provides security in volatile markets. Profits exceeding this guaranteed threshold are split between the marketer and the operator. This model is suitable for those who want to reduce risk but still participate in potential market gains.
- Tolling: Under tolling agreements, the BESS operator leases the facility to the marketer, who assumes full operational responsibility and market risk. In return, the operator receives fixed, guaranteed revenue. This model is ideal for investors seeking security, as it offers stable returns and the market potential lies 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. Under this model, a floor is agreed upon between a third-party financier and the plant operator, typically structured as a fixed-for-floating swap. The financier guarantees a fixed payment—based, for example, on the forecasted spreads of the day-ahead market—while the operator repays the financier based on the actual spreads realized in the day-ahead market.
This agreement typically covers a specific period, often up to five years. It guarantees the operator a predictable monthly income derived from the spreads in the day-ahead market. The floor amount is calculated based on monthly market results, and the daily amounts are aggregated and settled at the end of the month. By trading exclusively in the day-ahead market, the operator can secure the floor amount and establish a stable financial foundation.
The major advantage of this model lies in its flexibility. Since it is purely a financial instrument, there are no restrictions on marketing the asset in day-to-day operations. Operators and marketers are free to optimize their strategies in the intraday or balancing energy markets to increase value. Marketing in the day-ahead market typically accounts for only about one-third of the potential revenue from cross-market trading, which opens up significant 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 while simultaneously tapping into further potential through broader market participation.
Which financing model is best suited for 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 plant operators to align their investment approach with their long-term goals.
- Merchant: This option is ideal if you are confident that revenue from battery storage will remain stable or increase, particularly amid rising market volatility and widening 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 potentially narrowing spreads in the day-ahead market in the coming years. A key advantage of the floor structure is its appeal 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 while still leaving room for upside.
- Tolling: This option offers guaranteed payments without market fluctuations, making it ideal for risk-averse investors. It is designed for those who value security, need full protection against downside risks, and are not seeking additional returns.
Regardless of which financing model you choose, ESFORIN will maximize the returns on your investments across all markets and offers a comprehensive, one-stop solution for optimizing your energy storage system. Would you like to learn more about the various BESS financing models and find the right option for your project? Contact us at ESFORIN for expert advice and support!
