The rapid evolution of the utility-scale battery energy storage systems (BESS) market in Australia, Europe and the US has seen the emergence of a wide range of offtake products. These arrangements offer opportunities for more bespoke contracting solutions compared with traditional power purchase agreements (PPAs) for renewable energy projects. The options can largely be grouped into three categories: physical tolls, swaps and revenue floors.
These options vary significantly in terms of complexity and level of physical performance risk assumed by the parties. Whether one or more of these models is suitable for a particular BESS project will depend on various factors, including the parties’ operational capability, financial goals and risk appetite.
Physical toll agreements
One of the most prevalent structures for BESS offtake agreements is the ‘physical toll’ agreement, also known as a BESS licence or capacity services agreement. Under a physical toll agreement, the offtaker pays a fixed fee for the right to control the trading strategy and dispatch of the BESS. The offtaker is entitled to the market revenues and responsible for all market costs associated with trading the BESS capacity.
In Australia, the offtaker is typically appointed as the market-facing participant under the National Electricity Rules. The BESS owner retains responsibility for the operation and maintenance of the BESS, passing through the availability and performance guarantees obtained from its suppliers.
In Europe, physical toll agreements are also common. Currently, innovation in offtake contracts is being driven by investor demand for more sophisticated structures, as well as growing competition and sophistication across optimisers, especially utilities or energy traders, leading to other forms of BESS optimisation contracts.
There are also growing differences in performance to reflect a wide range of optimisation methodologies, from more traditional trader-driven models to fully automated algorithms. The importance of intraday and balancing revenue requires more sophisticated optimisation capabilities, including AI technology and the availability of solid balance sheets to back floors.
In the US, physical toll agreements are the largest category for utility-scale BESS projects, particularly in states with renewable portfolio minimums such as California and New York. These agreements are often awarded to cost-effective projects under competitive RFP solicitation processes. These agreements may allow the offtaker to purchase the entire capacity of the BESS units and implement a bidding and dispatch strategy and share in the market revenues.
In states such as California, where utilities are required to purchase power from renewable sources, the offtaker is appointed as the ‘scheduling coordinator’ under grid operator rules. The BESS owner retains responsibility for the operation and maintenance of the BESS and is often exposed to significant operational risk.
A key negotiating point for physical tolls is the pass-through of availability and performance guarantees and any shortfall damages for failing to satisfy minimum guarantees or round-trip efficiency requirements.
Swap arrangements and ‘virtual’ toll agreements
Swap arrangements are increasingly being pursued in all markets. A swap involves exchanging a fixed price (paid by the offtaker) for a floating price (paid by the owner, based on the market proceeds generated by the BESS). Swaps may be confined to specific periods and calculated based on the financial performance of the BESS as dispatched per the offtaker’s instructions. Alternatively, a swap may resemble a physical toll, where the offtaker pays an annual fee for a share of the net market revenue.
Virtual toll agreements, also known as ‘swaps’, are prevalent in the Australian and US energy markets, particularly in Texas. These purely financial contracts involve no or minimal physical performance obligations, making them simpler to execute and administer than physical tolls. Virtual agreements are favoured by large corporate purchasers with renewable credit carbon offset portfolios or by energy trading houses.
These agreements do not need to relate to 100% of a project’s capacity, providing a more flexible offtake structure. They can attract a wider range of potential offtakers, including financial or energy market participants seeking to maximise arbitrage opportunities.
In the European market, virtual toll agreements are expected to gain a bigger market share, similar to the emergence of virtual PPAs for renewable energy projects. These agreements can satisfy the demand of different offtaker types, from utilities and energy companies to industry and manufacturers.
Revenue floor agreements
Revenue floor arrangements guarantee the owner will receive at least a minimum amount of revenue over a specified period. If market revenue falls below the floor, the offtaker compensates the owner for the shortfall. In return, the offtaker is entitled to a share of market revenue exceeding a pre-agreed ceiling. Revenue floor arrangements can be implemented alongside swap arrangements to count towards the revenue floor.
In Australia, revenue floor structures are increasingly popular among government and government-owned entities supporting BESS projects. The federal government’s Capacity Investment Scheme, for example, is essentially a revenue floor arrangement. In commercial settings, revenue floor agreements are often linked to the actual availability of the BESS, limiting the offtaker’s risk exposure to market price fluctuations.
In European markets, revenue share arrangements both with and without a floor are regularly transacted, with tenors typically ranging between two and ten years. While a revenue floor can mitigate merchant risk, revenue share agreements without a floor price expose the owner to full market risk. Conversely, this allows the owner to capitalise on high market prices since there is no ceiling on its potential revenue.
As the full risk profile makes it more difficult to attract lenders, the unfloored revenue share model has been chosen for equity-funded projects, portfolios and co-located BESS. Revenue floor agreements are generally preferred where debt financing for a standalone BESS project is sought. European BESS projects can also benefit from capacity market mechanisms that certain countries (such as the UK, Belgium, Italy and Poland) have introduced, ensuring a reliable revenue stream for BESS projects.
Conclusion
The utility-scale BESS market in Australia, Europe and the US is rapidly evolving, driven by the need for more flexible and reliable energy storage solutions. The emergence of various offtake products—physical tolls, swaps and revenue floors—offers bespoke contracting solutions that can be tailored to meet the specific needs of different projects whether on a standalone basis or co‑located with renewable energy projects (as is increasingly the case in the US and Europe).
Whether in the form of a physical toll agreement, a swap, or a revenue floor arrangement, these contracts provide the flexibility needed to integrate BESS into the grid, complement renewable energy sources and meet regulatory requirements.
This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
Ged Cochrane, Florian Degenhardt and Raymond Azar are all partners at White & Case LLP.
This article is taken from Outlook 2025, our annual publication examining the year ahead in energy. Subscribers can click here to read their free copy. The publication can also be bought from our store here.
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