Modern BESS offtake agreements: A guide for project developers, investors and buyers

Offtake agreements are a key risk management tool

Offtake agreements are a key enabler for financing electricity infrastructure projects, including renewable energy and battery energy storage systems (BESSs). There are two reasons for this:

1. Long lifespans of up to 20 years for solar and batteries, and 30 years for wind, and
2. High spot market volatility where electricity prices can vary from -$1,000/MWh to $17,000/MWh in the space of five minutes.

These factors make it highly risky to invest in electricity infrastructure projects on merchant basis.

As debt capital is cheaper than equity capital, obtaining a sufficiently high degree of gearing is key to lowering the financing cost of a project.

By fixing the price received for electricity, offtake agreements lower project revenue volatility, make it easier for projects to meet interest and principal commitments and, in turn, enable higher project gearing.

For this ‘de-risking’ to occur, offtake agreements need to be of sufficient tenor with counterparties of sufficient credit quality (typically, but not always, investment-grade). The greater the proportion of a project’s capacity that is covered by these offtake agreements, the greater the gearing and in turn the lower the financing cost.

In our experience, renewable energy and BESS developers typically need offtake agreements of at least 7 years in duration with investment-grade counterparties (for 60-80% of the project’s capacity), so that the project can then obtain a debt-to-equity (or gearing) ratio of 70-80%.

This said, some developers are comfortable with a lower gearing ratio because they accept a lower contracted percentage and / or a non-investment grade counterparty.

The CORE Markets team works with clients that have diverse needs and interests, which we cater for in our commercial advisory work. See how we support offtake sellers and buyers, respectively.

Start with strategy, steps in structuring a BESS offtake agreement

Project developers, buyers and investors have diverse needs and interests. While all want to maximise return on investment and minimse risk, the path to get there is not one-size-fits all.

The CORE Markets team has over 20 years’ experience supporting renewable energy project developers and energy buyers in structuring offtake agreements.

We provide support over three phases, from the initial strategy to a two-step market engagement process. The strategic phase is the critical first step to a project’s commercial success. It’s discussed in more detail below.

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Key strategic considerations

Prior to engaging the market, it is essential for project developers to work through the following key strategic considerations.

1. Define your risk profile
   This includes a clear financial model and a deep understanding of the type of ideal partners, including the credit risk associated with potential counterparties. Typical BESS offtake buyers are considered in more detail below. Importantly, this risk model also needs to include the contracted/spot revenue balance and the residual merchant exposure you’re willing to accept.
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2. Understand your preferred offtake structure
   Different structures – discussed below - have different implications for how spot price and project volume risks are allocated between offtake buyer and seller. For example, BESS “physical tolls” transfer the dispatch rights to the offtake buyer, meaning the offtake seller is no longer directly exposed to the spot market risks and price volatility. In contrast, offtake sellers retain dispatch rights under “virtual tolls”, meaning they are exposed to, and directly manage, the spot market risks faced by the BESS.. The desired contract duration is also important to define at this point.
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3. Determine your project configuration
   As we discuss below, coupled generation-BESS systems (e.g., DC-coupled PV-BESS) can and often do require different contract structures than standalone PV or standalone BESS. This is because coupling requires resolving whether the generator or the BESS has priority of generation, in periods where both would seek to generate. Resolving this can be easier when the offtaker for the BESS is the same as for the generator, and when the structure of the offtake (in particular, a physical or virtual structure) is the same on both assets.

Common buyers of BESS offtake agreements and their motivations

When it comes to BESS offtake agreements, there are several key buyer groups, each with their own unique motivations and considerations.

The main interested groups are:

• Energy retailers are often driven by the need to hedge their retail load and maintain or increase integration between retail and generation. They also see value in being proactive about supporting the transition to lower emissions. Many large retailers already have or are developing their own generation and storage portfolios, and this impacts their level of potential interest. They often prefer to manage their energy procurement through trading methods such as the ASX and over the counter (OTC) markets, which allows them flexibility without committing to long-term contracts.
• Trading houses have a high level of interest in BESS offtake agreements. Their primary motivations include gaining access to spot and Frequency Control Ancillary Services (FCAS) markets and the belief that BESS revenue may exceed the offtake price. Typically, these entities do not have a physical presence in the National Electricity Market (NEM) and prefer virtual offtake structures that do not require them to become the Financially Responsible Market Participant for the asset. However, some are open to physical structures as well.
• Commercial and Industrial (C&I) electricity consumers currently have a lower level of interest, primarily motivated by the ability to hedge their consumption and procure 24/7 carbon-free energy (24/7 CFE). This is likely to change over time, particularly as emerging concepts such as 24/7 CFE gain more traction.
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  There is a wide spectrum of ambition among C&I customers around reducing their emissions and their willingness to pay for firmed renewables. This is influenced by factors such as rising production costs and recent political outcomes. Some companies are proactive in signing offtake agreements for firmed renewable generation (for example Rio Tinto’s recent agreement with Edify, or BHPs agreement with Neoen), while other organisations may be more cost-sensitive and reluctant to contract firmed renewables. Offtake agreements typically include availability and performance guarantees, with the actual dispatch of the asset managed by the operator.

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Typical structures of BESS offtake agreements: standalone BESS

Offtake agreements for standalone BESS projects typically have the following structures:

• Physical Toll (PT) agreements involve the buyer paying a predetermined amount and receiving all market revenues, while also operating the asset. However, this structure can be problematic if the buyer doesn't control all capacity behind the connection point. The buyer must also be capable of becoming a market participant. Additionally, the parties must be aware that Physical Toll agreements are usually considered as leasing agreements for accounting purposes.
• Virtual Toll – Time Bands agreements allow the buyer to pay a predetermined amount and nominate when to charge and discharge the asset. Nominations can typically be made up to 15 minutes before the trading interval, with settlement based on actual price outcomes and nominated volumes. While the seller operates the asset and is likely to defend the buyer’s nominations, they are not obligated to. Under this model the buyer does not gain access to FCAS markets, and the seller can have multiple contracts per connection point. It’s important to note that the offtake may still be valid even if the asset is subject to network curtailment.
• Virtual Toll – Price Bands agreements are similar to Time Band Virtual Tolls but involve the buyer nominating charge and discharge quantities over 10 price bands for each trading interval. The buyer pays a predetermined amount, and settlement is based on actual price outcomes and nominated volumes. The seller operates the asset and is likely to defend the buyer’s nominations but is not obligated to. Like with Time Band Virtual Tolls, the buyer does not gain access to FCAS markets, and the seller can have multiple contracts per connection point. Likewise, the offtake may still be valid even if the asset is subject to network curtailment.
• Revenue Swap agreements involve the buyer paying a predetermined amount and receiving an agreed share of all market revenues. In this structure, the buyer and seller need to agree on how the asset will be operated.
• Bespoke Shapes / Times agreements are tailored to specific needs, where the buyer and seller agree on a specific shape to be transacted, such as a 5-9pm flat swap (with or without green certificates). The buyer pays a predetermined amount and receives market revenues for the agreed shape. The seller operates the asset and is likely to defend the agree shape but is not obligated to. Buyers are typically interested in buying a fixed shape during peak periods, and charging the asset is usually outside of such contracts.

CORE Markets is at the forefront of offtake innovation that better meets the needs of both buyers and sellers than the status quo. In collaboration with industry, we developed several contract types, including the ‘solar shape’, ‘inverse solar shape’, ‘wind shape’, ‘virtual storage swaps’ and ‘super-peak flat swaps’.

The super-peak swaps are an example of the movement towards even more granular contracts, such as hourly power flat swaps. We will cover these contracts in more detail in a future CORE Markets article.

Typical structures of BESS offtake agreements: hybrid renewable and BESS projects

Offtake agreements for hybrid renewable and BESS projects typically have the following structures:

• Physical Toll (Entire Asset) agreements involve a single contract where the buyer pays a predetermined amount and receives all market revenues, while also operating the asset. This structure is similar to a Physical Toll on standalone BESS.
• Run of Meter on Solar/Wind plus Toll or Revenue Swap on BESS agreements effectively involve two separate contracts. Although the hybrid asset typically has a single connection point with the National Electricity Market (NEM), the offtakes are settled based on separate metering of the storage and wind/solar assets.
  
  The storage component is covered by a toll or other contract as a standalone storage project, while the solar/wind component is covered by a standard run of meter offtake. In this setup, the buyer pays a set price per MWh for the energy produced by the asset, subject to null at $0 or floor at $0 terms. These terms protect the buyer from negative spot prices but do not resolve negative price risk for the seller.

Considerations for hybrid contracting

When approaching contracting of hybrid systems, the configuration is incredibly important. Shared connection points can offer financial and technical efficiencies but operational and contractual complexities. Figure 1 below shows three different configurations.

DC-coupling is becoming the main method of coupling for PV-BESS hybrid systems. We are also seeing wind-BESS AC-coupled systems, although most are still in development and haven’t reached financial close.

We expect some of these projects, especially those in southwest NSW REZ, to reach financial investment decision during CY2026.

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Approaches to pricing storage offtakes

Determining an appropriate price for a storage offtake is not a straightforward exercise. There are three different approaches typically taken to this determination.

• ‘Cost Plus’ pricing involves setting the price based on the estimated capital expenditure (capex) of the project plus a percentage increase to ensure the developer receives an appropriate return on investment. This approach requires a thorough understanding of the project's costs. For the offtake buyer, it is crucial to be confident that the spot market revenue will be higher than the offtake price, or that they can sell the capacity to another entity at a higher price.
• Using an electricity price forecast involves pricing the offtake based on forecast revenue from an electricity market model. The average gross margin, inclusive of FCAS revenues or energy arbitrage, is determined, and a discount is applied to the spot price to reflect the revenue stability provided by the offtake agreement.
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  However, as the saying goes, “all forecasts are wrong, but some are useful.” Forecasts can vary widely and all require extensive assumptions. For example, few would have factored in the jump in gas prices due to the war in Ukraine, nor the retirement of Hazelwood with less than 5 months notice.
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  In addition to discounting the forecast spot revenues to account for the de-risking risk provided by an offtake, offtake buyers apply a further discount to the spot revenues to reflect the uncertainty associated with an unknown future.

• Running a market sounding process involves seeking an indication of price from potential offtake buyers or sellers. However, many buyers and sellers are reluctant to provide indicative prices for two main reasons. First, the price is often asset-specific due to various factors, such as the risk of curtailment due to network constraints. Second, the capacity of buyers and sellers to evaluate and execute offtakes is limited, so they prefer to engage in processes they believe are likely to lead to a deal.
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• Subscribing to the CORE Markets quarterly Renewable Energy Offtake Market Report. The report covers trends in offtake pricing and structuring, timelines and process for offtake market soundings, drivers of offtake prices, and evolving contract structures. It is a report that is used, and is useful for, parties considering whether to:
  • undertake an offtake process of their own
  • determine the ‘right’ time to sound out / engage the market when selling or buying an offtake, and
  • participate in an existing process or forego that specific opportunity.

Looking to the future

One thing is for certain, the power market will continue to evolve rapidly in line with renewable energy adoption, regulatory changes, and technological advancement.

Beyond physical and virtual offtake agreements for standalone vs. hybrid projects, contract innovation is reshaping how energy is bought, sold and consumed. New contract structures are emerging, including hourly power, and additional fixed-time block contracts beyond the 5-9pm ‘super peak’ swap.

The CORE Markets team is at the forefront of these changes and regularly shares insights and updates.

You can stay updated by:

• Signing up to receive our insights directly in your inbox – please see the link below
• Subscribing to our quarterly Renewable Energy Offtake Market Report
• Getting in touch to explore how to make the most of the current market dynamics