Thanks for sharing! The risks are now with the optimisers and those will require a solid margin. CAPEX of BESS is still high, requiring high tolling fees. Thus, only lessees with strong trading expertise can secure attractive returns. However, the on-going drop in CAPEX will help to lower the toll revenue requirements. Overall, I am drawing following conclusion from tolling agreements.
1. Shifting Risks, Accelerating Deployment
While battery storage (BESS) holds immense potential, high upfront costs have kept it a niche investment. Tolling agreements shift the risk from investors to optimizers, creating a win-win situation. This model opens the door for risk-averse infrastructure investors who were previously deterred by BESS complexity and volatile returns. In my previous job I spoke to German investors who confirmed tolling agreements make BESS a more accessible option, accelerating the deployment of standalone storage systems.
2. Optimizers: New Power Players
Many BESS optimizers, especially startups, lack the capital to own and operate storage assets themselves. Traditionally, they earned a share of generated revenue. Tolling agreements empower these companies to transition into BESS trading and optimization without significant capital investment.
A key challenge for BESS investment has been meeting the return expectations (7-10%) of infrastructure investors. BESS technology costs are dropping across the board, from Lithium-Ion to other promising chemistries. This decline paves the way for lower tolling revenue thresholds, making BESS projects even more attractive for investors.
Consider the example of Gore Street's UK assets, with average revenues of £77,300/MW. Signing a tolling agreement at £70k/MW leaves optimizers with little running room to cover risks and generate profits. As CAPEX continues to fall, investors will be comfortable accepting lower tolling revenue, translating into better margins for optimizers.
Interesting analysis Thomas. What do you make of Modo's assessment of this deal, and the tolling structure more broadly? https://modoenergy.com/research/aug-24-penso-power-shell-tolling-agreement-bw-ess-battery-energy-storage-bess-revenues-forecast-irr
Thanks for sharing! The risks are now with the optimisers and those will require a solid margin. CAPEX of BESS is still high, requiring high tolling fees. Thus, only lessees with strong trading expertise can secure attractive returns. However, the on-going drop in CAPEX will help to lower the toll revenue requirements. Overall, I am drawing following conclusion from tolling agreements.
1. Shifting Risks, Accelerating Deployment
While battery storage (BESS) holds immense potential, high upfront costs have kept it a niche investment. Tolling agreements shift the risk from investors to optimizers, creating a win-win situation. This model opens the door for risk-averse infrastructure investors who were previously deterred by BESS complexity and volatile returns. In my previous job I spoke to German investors who confirmed tolling agreements make BESS a more accessible option, accelerating the deployment of standalone storage systems.
2. Optimizers: New Power Players
Many BESS optimizers, especially startups, lack the capital to own and operate storage assets themselves. Traditionally, they earned a share of generated revenue. Tolling agreements empower these companies to transition into BESS trading and optimization without significant capital investment.
There are some funky set-ups, e.g. Dansk Commodities (owned by Equinor) was optimising the BESS owned by Equinor. Tolling agreement are another was around that. https://danskecommodities.com/about/media/danske-commodities-signs-first-battery-storage-asset-in-the-uk
3. Falling Costs, Growing Margins
A key challenge for BESS investment has been meeting the return expectations (7-10%) of infrastructure investors. BESS technology costs are dropping across the board, from Lithium-Ion to other promising chemistries. This decline paves the way for lower tolling revenue thresholds, making BESS projects even more attractive for investors.
Consider the example of Gore Street's UK assets, with average revenues of £77,300/MW. Signing a tolling agreement at £70k/MW leaves optimizers with little running room to cover risks and generate profits. As CAPEX continues to fall, investors will be comfortable accepting lower tolling revenue, translating into better margins for optimizers.
https://www.gsenergystoragefund.com/docs/librariesprovider22/archive/reports/annual-report-2024.pdf
I was just reading Engelhart's Commodity Perspective and multiple times the word energy storage was mentioned, so a hot topic for all the traders. https://www.linkedin.com/pulse/balancing-act-trading-renewables-europe-afvre/