Battery spreads are volatile and evening-weighted, making them difficult to finance. The Nelson Review’s ESEM shaping swap would let a battery sell its spread forward to a central buyer, turning merchant revenue into contracted cashflow.

The ESEM Administrator would offtake the long-term contract from the battery, giving the project revenue certainty over the tenor gap lenders need to finance. As delivery gets closer, the Administrator would resell shorter-dated standardised products into the market.

Under the proposed design, the swap would settle against a spread nominated each morning from the predispatch residual-demand forecast. However, the battery would run its own strategy because the contract is financial.

The shaping swap has to answer two questions: how closely the standardised spread matches merchant battery earnings, and who carries scarcity-day exposure when it diverges.

This article examines who would buy and sell the product, how the nominated block differs from merchant optimisation, and what it means for battery assets looking to turn arbitrage into financeable revenue.

Executive summary

• The shaping swap turns battery arbitrage into contracted cashflow. A battery sells a standardised daily spread to the ESEM Administrator, which it warehouses and resells shorter-dated products later.
• Renewable-backed loads create the strongest buyer-side hedge need. The central buyer remains important because private demand is fragmented and shorter-dated.
• The nominated block is designed to shape demand. It follows forecast residual demand, so it will not always align with the highest-value merchant dispatch periods.
• Forecast merchant spreads support four-hour batteries and longer. A two-hour battery falls short because the forecast spread does not finance the build.
• Scarcity-day exposure is hard to price. Force-majeure, constraints and availability limits can leave the seller owing the spread without offsetting merchant revenue.

Renewable-backed loads are a natural fit for the shaping swap

Batteries naturally sell the swap because they charge when prices are low and discharge when prices are higher. The shaping swap lets them sell that exposure forward without giving up operational control.

Few parties naturally buy the swap. Renewable-backed loads have one of the clearer buyer-side positions because their generation exposes them to low midday prices, whilst residual load exposes them to higher evening prices.