Battery energy storage systems (“BESS”) are evolving rapidly in Germany and poised to become a key pillar of the national energy supply within years. As the market matures, the focus is shifting to the legal and commercial aspects of BESS marketing agreements. While Germany does not yet have a fixed contractual standard, general negotiation points can be identified based on the typical contractual pricing and remuneration models (tolling, profit share and floor price arrangements).
BESS ramp-up in Germany
The German BESS market is booming, with a sharp rise in grid connection applications and an increasing number of approved and realised projects, both stand-alone installations and co-located assets with photovoltaic and wind energy systems. One of the key drivers of this growth is the privileged status for BESS in unzoned areas recently introduced in the Building Code (Baugesetzbuch). And as previously reported (see our article), the classification of BESS as systems of overriding public interest is intended to accelerate and simplify planning and approval procedures. On the product side, an increased need for flexibility is being driven by substantial price fluctuations on the electricity markets and the more volatile feed-in of renewable energies. This means continuing high demand for the three operating reserves – FCR (frequency containment/primary reserve), aFRR (secondary reserve) and mFRR (tertiary reserve). At the same time, intraday and day-ahead arbitrage is on the increase.
Typical BESS marketing models
Current BESS marketing is largely based on three recurring contract models – tolling, floor price and profit share agreements. They differ mainly in terms of risk and revenue allocation and the bankability of the BESS investment.
- Tolling: The operator provides a BESS that meets the agreed specifications. The marketer is responsible for dispatch and pays a fixed and/or variable remuneration for the use of the BESS (tolling fee). By largely shifting the market price risk to the marketer, the model provides the operator with plannable income, which typically simplifies the process of obtaining financing for the BESS.
- Floor price: Similar to tolling, the operator provides the BESS and the marketer handles dispatch. A minimum revenue (floor) is agreed and any additional revenue that arises across contractually specified market situations is divided between the operator and the marketer. The operator accordingly bears some of the market risk and is not guaranteed any (pro rata) additional revenue. Whether it can obtain financing for such a model therefore depends largely on the agreed floor price.
- Profit share: The parties share the revenue without agreeing any (relevant) minimum remuneration for the operator. Both the operator and the marketer therefore bear the full market price risk. It is typically only possible to obtain financing for projects using profit share models if the equity ratio is high or if additional collateral can be provided over and above the BESS. The operator will generally enjoy a larger share of any marketing profits, however.
Typical negotiation points
While the risk profile varies depending on the chosen model, the first recurring negotiation points are beginning to crystallize across the market. These include:
- COD framework: The BESS assets that are now to be marketed are still predominantly in the development phase and the marketing agreement is one of the final pieces needed for the operator to give the go-ahead. The operator and the marketer therefore agree on a framework for the system’s commissioning (commercial operation date, “COD”), usually specifying a target COD and laying down the legal consequences of not meeting the COD. In addition to simple postponements of the COD, customary measures include fee reductions and termination rights. However, it is not uncommon for the agreement to cover the possibility of an early COD, with early-COD windows allowing the marketer to access markets sooner and thereby generate revenue that may be shared between the parties.
- Termination provisions: These are another key negotiation point. BESS marketing agreements typically provide for fixed terms and, where applicable, extension options. Termination rights are generally also agreed, with some of these resulting in a termination fee being payable (the termination amount). The termination amount may, for instance, be determined using objective formulas that take into account lost margins and/or the remaining term of the agreement and can be accompanied by caps and obligations to mitigate losses. The bankability of a BESS asset should always be taken into account when assessing termination rights (and the consequences of termination).
- Availability provisions: Given the limited experience with BESS in the German market and current uncertainty regarding their lifecycle degradation, availability provisions are often at the heart of negotiations. In addition to the technical parameters, it is also necessary to lay down provisions on nomination, (planned/unplanned) maintenance, wear and tear and other capacity indicators. The marketing agreement must specify the legal and commercial consequences for the various availability scenarios, usually in the form of a discount on the operator fee.
- Redispatch and other restrictions: Another issue in marketing agreement negotiations is how to handle redispatch and other constraints on grid operators. Drafting these provisions remains a significant challenge, as BESS have not yet been explicitly integrated into the redispatch regime, making it difficult for contractual parties to anticipate the long-term economic implications. And increasingly, flexible grid connection agreements are being made with grid operators, potentially leading to further BESS-related restrictions that will need to be reflected in contracts.
- Change-in-law provisions: The rapidly evolving regulatory landscape has made change-in-law clauses indispensable. Changes to the regulatory environment in the coming years could create both advantages and disadvantages for BESS marketing, making it hard to find workable compromises on change-in-law provisions. Typically, parties do not rely on the statutory framework provided by section 313 Civil Code (Bürgerliches Gesetzbuch) in this regard. To ensure the bankability of a BESS asset, an operator typically requires that remuneration remains fixed, with fee reductions permitted only under strictly defined and exceptional circumstances. Change-in-law clauses should specifically cover the potential shift towards a capacity market, updated prequalification requirements as well as increases in, or the first-time levying of, charges and grid fees.
- Technical parameters: From a technical perspective, key considerations include parameters and key performance indicators such as usable energy and power, C-rate, round-trip efficiency as well as response times and ramp rates. The operator will typically agree these parameters with its supplier/general contractor.
- Other provisions: In addition to these typical negotiation points, discussions also often focus on provisions relating to force majeure, mutual financial safeguards or conditions precedent (in some cases also with regard to internal corporate decisions).
Conclusion
A standardised BESS marketing agreement is unlikely to materialise in the near term. In the meantime, negotiations are complicated by a lack of long-term experience with BESS in the German market, leaving parties to navigate – and contractually hedge against – risks that are not yet fully clear.
Forward
