Floor and tolling pricing models: How to optimise BESS profitability in volatile markets
The role of battery energy storage systems (BESS) has become increasingly critical in stabilizing power grids and optimizing energy usage as part of the ongoing energy transition. With the integration of renewable energy sources such as wind and solar, the demand for efficient energy storage solutions continues to rise. In Germany, battery energy storage systems have demonstrated remarkable profitability, generating revenues of up to 250k€/MW for a two-hour, two-cycle system in 2023. This profitability is driven by factors such as the expansion of solar capacity, extreme weather events, and political disruptions, all of which contribute to increasing market volatility.
The growing number of battery assets has led to the development of various financing and revenue models designed to incentivize investment while managing the risks associated with volatile energy market prices. In this context, ESFORIN has emerged as a pioneer in providing one-stop flexibility marketing solutions in the various relevant markets, enable innovative risk-sharing models to ensure financial security for BESS developers and owners.
Understanding Battery Energy Storage (BESS) financing models
Due to the fluctuating nature of energy markets, battery energy storage projects require flexible and innovative financing structures that balance financial security with market opportunities. These models are designed to help asset owners and investors effectively manage risks while maximizing returns. Generally, three distinct structures (see figure 1) have emerged that cater to different risk appetites and financial goals:
- Merchant: This structure involves a predetermined profit-sharing arrangement between the battery energy storage asset owner and the optimizer. With this model, both parties share the risks and rewards of market performance, providing a reliable income stream while still allowing for potential gains during periods of price surges.
- Floor: Under this model, the battery owner is guaranteed a minimum level of revenue, providing security in unpredictable markets. Profits above the guaranteed threshold are shared between the optimizer and the owner. This option is ideal for those seeking reduced risk while still participating in potential market gains when prices exceed expectations.
- Tolling: In a tolling agreement, the battery energy storage owner leases the asset to an operator who assumes full operational responsibility and market risks. In return, the owner receives fixed, guaranteed earnings. This model is ideal for investors who prioritize security and guaranteed returns, without the need for exposure to market fluctuations or additional upside potential.
Fig. 1 BESS Pricing Models
Deep Dive: Floor models
The floor pricing model has recently gained significant traction as an attractive option for BESS financing. In this model, an agreed floor is set between a third-party financer and the asset owner, typically structured as a fixed-for-floating swap. The financer guarantees a fixed payment based on the forecasted spreads of, e.g. the day-ahead auction market, while the asset owner pays the actually realized day-ahead spreads back to the financer.
This arrangement typically spans a specific time frame, often up to five years. It ensures the asset owner a predictable income derived from the day-ahead auction spreads. The floor amount is calculated based on monthly market spreads, and daily amounts are aggregated and billed at the end of each month. By solely optimizing in the day-ahead market, the asset owner can secure the floor payment, creating a stable financial foundation.
Fig. 2 Floor Concept
The major advantage of this model is its flexibility. Since it is a purely financial instrument, it doesn’t impose restrictions on how the asset is optimized in day-to-day operations. Asset owners and their optimizers are free to explore other markets, such as the intraday or ancillary services markets in order to value-stack. In fact, day-ahead market optimization typically accounts for only about one-third of the potential revenue from full cross-market optimization, leaving significant revenue opportunities in these additional markets. With strong confidence in cross-market optimization, optimizers can often outperform the day-ahead-only strategy. This floor model, therefore, offers a promising opportunity for asset owners to secure a fixed income while unlocking further upside through broader market participation.
Which financing model is best suitable for my battery energy 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 different levels of security, market exposure, and revenue potential, allowing asset owners to align their investment approach with their long-term goals.
- Merchant: This option is ideal if you have confidence in a stable or positive trend in battery revenues, especially with increasing market volatility and wider spreads in the day-ahead market. It’s suited for those who prioritize profit maximization and do not need additional collateral for BESS financing.
- Floor: This model is the right choice if you expect reduced volatility in the coming years, with potentially decreasing spreads in the day-ahead auction market. A key benefit of the floor structure is its appeal to lenders, as it guarantees a fixed return, making it easier to secure financing with a higher leverage for your BESS project. Floor payments offer a safety net while still leaving room for upside.
- Tolling: This option offers fully secured, guaranteed payments with no exposure to market fluctuations, making it ideal for risk-averse investors. It’s designed for those who prefer peace of mind, need full downside protection, and do not seek additional upside potential.
No matter which financing structure you choose, ESFORIN is committed to maximizing the returns from your assets across all markets, providing a seamless, one-stop solution for your energy storage needs. Ready to learn more about battery energy storage financing structures and find the right option for your project? Reach out to us at ESFORIN for expert guidance and support!
