Valuation of Financial Tolling Agreements for Energy Storage

The large-scale deployment of battery energy storage systems (BESS) across Europe is no longer a promise of energy transition but a fully established market reality. In 2024 alone, installed grid-scale storage capacity in Europe exceeded 10 GW on a cumulative basis, and projections for the next decade indicate a five- to eightfold increase.

From a financial perspective, what truly matters is the increasing sophistication of the contractual structures enabling this deployment. The traditional pure merchant model, under which the battery operator fully bears price risk and captures whatever value the market provides, remains in place. However, within the project finance segment it has progressively given way to structures that allow risks to be allocated more efficiently between the party building and operating the asset and the party willing to take exposure to power price spreads.

Among these structures, Financial Tolling Agreements (FTAs) are gaining traction to monetize the intrinsic optionality of storage assets without assuming operating risk. While the underlying logic is well established in other contexts, its application to battery storage introduces technical and contractual features with no direct precedent.

An FTA on storage is, in essence, a financial derivative. There is no physical delivery of electricity: the contract is cash-settled against the theoretical value that an ideal battery would have generated by operating optimally in the spot market. The asset owner receives a fixed periodic payment for availability (capacity fee) and, in exchange, transfers to the buyer the value of the optimal dispatch (Optimal Dispatch Value, ODV). The actual physical operation of the asset is irrelevant for settlement purposes; cash flows are determined by an optimization algorithm applied ex post to published market prices.

The ex-post calculation of ODV is unambiguous: given published hourly prices and the contractual technical constraints, the optimization algorithm produces a unique outcome. The challenge arises in balance sheet valuation, which requires projecting that same ODV over a horizon that typically ranges from five to fifteen years, and in some cases up to twenty-five years. The entire complexity of the instrument lies in that projection.

A storage FTA structured as a Virtual Battery Storage arrangement meets all three criteria required to qualify as a derivative. Its value changes in response to an identifiable underlying (the intraday power price spread), it requires no significant initial investment or one that is smaller than would be required for contracts with a similar response to changes in market factors, and it is settled at a future date. Settlement is purely financial, there is no physical delivery, and the notional is expressed in terms of contracted capacity (MW), not actual electricity volumes.

Once classified as a derivative, the instrument must be measured at fair value through profit or loss (FVTPL) at each reporting date, unless it is designated as a hedging instrument for accounting purposes.

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. In practice, this requires answering a question that is far from trivial for a battery FTA: how much would an informed third party be willing to pay to assume the position of Party B in this contract as of the valuation date?

Conceptually, the value of the contract at any point in time is the difference between the present value of expected future ODVs receivable and the present value of future capacity fees payable.

Fixed component: the Capacity Fee

The capacity fee is a predetermined cash flow, typically expressed in EUR per MW per year, which accrues daily and is settled monthly or quarterly. Discounting these future cash flows requires an appropriate discount curve and, where relevant, consideration of counterparty credit risk (CVA/DVA if a rigorous approach is adopted).

What deserves closer attention is whether the capacity fee includes indexation clauses (for example, inflation-linked adjustments), predefined step-ups, or adjustment mechanisms linked to asset availability.

Variable component: future Optimal Dispatch Value

Estimating future ODV requires, in practice, solving two separate problems.

First, electricity prices must be projected at hourly granularity (typically half-hourly or quarter-hourly intervals in Spain) for each day over the remaining term of the contract. This is fundamentally different from projecting average daily or monthly prices: the value of storage depends entirely on intraday price dispersion, not on average price levels. A day with an average price of EUR 60 per MWh may generate zero ODV if prices are flat across the day, or a very significant ODV if there is EUR 40 per MWh spread between off-peak and peak hours. What matters is the shape of prices, not the average.

Second, for each projected price scenario, the contractual optimization problem defining ODV must be solved: maximizing arbitrage profit from charging and discharging subject to power and energy constraints, round-trip efficiency (RTE), maximum daily cycles, state-of-charge balance at the start and end of the day, and the prohibition of simultaneous charging and discharging.

Neither of these steps benefit from a well-established market standard, placing the valuation firmly within Level 3 of the IFRS 13 fair value hierarchy.

Day 1 calibration and initial P&L recognition

At initial recognition, the key issue is not how to model the FTA, but how to deal with the difference between the fair value produced by the model and the transaction price agreed by the parties (capacity fee and other contractual terms).

In practice, it is generally recommended to calibrate the model to zero on Day 1. As a Level 3 instrument, certain market data inputs are not directly observable and therefore not fully reflected in the initial modelling of the financial instrument. This typically involves adjusting the less observable inputs, most commonly intraday spread volatility or assumed intraday shapes, within reasonable bounds to reconcile the model fair value with the agreed capacity fee. Tension arises when such calibration requires inputs outside defensible market ranges: the model should not be adjusted simply to match the price, but to reflect the best observable estimate.

Actionable recommendations before signing an FTA

For treasury and reporting teams at independent power producers, renewable developers, and infrastructure players with imminent exposure to storage FTAs, the following points should be fully defined prior to contract signature, rather than deferred to the first accounting close.

1. Contractually specified objective price source. Clear definition of the market, product (day-ahead, continuous intraday, intraday auction), and publication used for the ex-post ODV calculation.
2. Closed technical optimization window. Defined limits for maximum daily cycles, contractual RTE (nominal and degraded), initial and final state of charge, and symmetric or asymmetric power constraints.
3. Unambiguous ex post ODV calculation methodology. Detailed description of the optimization algorithm, tie-breaking rules, treatment of negative prices, and handling of missing or late data.
4. Technical dispute resolution mechanism with an independent calculation agent. Clear process for resolving disagreements on ODV for a given period, including data sources, timelines, and, where applicable, cross-references to ISDA Definitions.
5. Documented accounting policy. Instrument classification (derivative at FVTPL or hedge designation), approved valuation methodology, data sources and inputs, Day 1 P&L policy, treatment of CVA/DVA, and the Level 3 disclosure framework.