Battery energy storage in GB earned between £55,000 and £120,000 per MW in 2023-2025, depending on the asset. That revenue came from wholesale trading, the Balancing Mechanism, frequency response, the capacity market, and reserve products. Until now, the only benchmark available for a financial contract was the day-ahead spread, used in day-ahead swaps. That is a loose proxy for battery revenues at best.

Modo Energy's ME BESS GB Index is the first BESS revenue benchmark authorised by the Financial Conduct Authority (FCA) under the UK Benchmarks Regulation (BMR). Banks, funds, and insurers can now reference it in regulated financial agreements. This opens the door to fixed-for-floating revenue swaps referenced to what batteries actually earn.

Key takeaways

• A fixed-for-floating swap lets a battery owner lock in a guaranteed £/MW/year. On the other side, a trading house, utility, or insurer takes the floating upside: a way to take a position on BESS revenues without owning an asset.
• Swaps are tactical. They can bridge the gap between commercial operation and a tolling agreement, hedge tail risk, or give a utility exposure to BESS revenues without owning a battery.
• Swaps execute in days under a 1-2 page ISDA confirmation, compared to 3-9 months and 50-100+ pages for a tolling agreement.
• The choice of floating reference determines how well the swap works. For a representative 2-hour asset, the ME BESS GB Index halves the basis risk compared to day-ahead spreads (average daily gap of £29/MW vs £61/MW).
• A three-party structure with a bank intermediary could let counterparties handle the accounting side more cleanly, since banks already hold derivatives on their trading books.

We are running a workshop on FCA-regulated BESS benchmarks and revenue swaps in May. If you would like to be involved, or have questions on this research, contact zach@modoenergy.com.

Swaps basics: locking in predictable revenue

Swaps are a financial overlay on market revenues. The asset owner receives a fixed £/MW/year from a counterparty. In return, the asset owner pays the floating index value. Neither party changes how the battery is dispatched or optimised. Swaps are purely financial.

Swaps reduces revenue uncertainty for the asset owner, but don’t remove it entirely. The battery will not earn exactly the index value in any given period.

Consider a swap where the asset owner receives a fixed £55k/MW from the counterparty and pays the floating ME BESS GB Index. In one month, the index is £70k/MW while the battery actually earns £75k. The asset owner pays £70k on the floating leg, receives £55k fixed, and keeps the £75k market revenue. Net: £60k. The next month, the index falls to £35k/MW and the battery earns only £30k. Net: £50k.

The difference is basis risk: the gap between what the battery earns and what the index says. The closer the floating leg tracks actual asset revenue, the tighter the hedge. This is why the choice of reference index matters. Later in this article, we show why the ME BESS GB Index is a better reference than the day-ahead spread.

The counterparty agrees for the same reasons anyone enters a commodity swap: it has a view on future BESS revenues, earns a spread, or is hedging a correlated position like a retail book.

Where swaps fit: tactical use cases

A swap moves revenue risk to the party best placed to carry it. Tolling agreements bundle the hedge with the optimisation service. They run to 50-100+ pages, take 3-9 months to negotiate, and lock both parties in for 10-15 years. A swap settles under a standard ISDA confirmation of 1-2 pages. Tenor is flexible: months, quarters, or years. Execution can take days.

That speed and flexibility create use cases that tolling agreements cannot serve.

• Between COD and the first toll. Banks typically give a new battery a buffer after commercial operation to get a toll signed. That window can be tight if market conditions shift or a counterparty pulls out. A swap lets the asset owner lock in revenue for a quarter or a year at a time while the toll is negotiated.
• Between two tolls. A toll expires and the next one is still in negotiation. A swap covers the gap without committing to another decade-long contract.
• After the last toll. A battery could have a 20-year design life, but tolls are often 7-10 years with a mini-perm at best. A swap hedges the tail in shorter increments while the market develops.
• After augmentation. An asset expands its capacity, for example from one hour to two hours. Instead of re-negotiating the original toll, the owner can layer a swap over the extra investment to lock in revenue on the new capacity.
• On top of a floor. An owner signs a floor agreement to cover debt service, then sells off the revenue above the floor through a swap. That combination hedges the downside for lenders while locking in more of the upside.

Who could use these revenue swaps?

A utility long on wind, for example a retailer with a wind-heavy PPA book, wants exposure to BESS floating revenues to balance the correlation in its existing book. A swap gives it that exposure as a purely financial position, without the need to own or operate a battery.

Swaps also unbundle the hedge from the optimiser. An asset owner can switch route-to-market provider without unwinding its revenue position. A single counterparty can layer swaps across multiple assets, tenors, and sleeve sizes in one deal, bundling an entire portfolio's tail risk into one contract.

What about the balance sheet?

What happens when a counterparty holds a swap for several years? A swap's value changes over time, and depending on how it is classified, those changes may flow through quarterly earnings. Ultimately, swaps are derivatives, and they can create accounting complexity.

One possible structure is to introduce a bank as an intermediary. The bank sits between the asset owner and the counterparty, running back-to-back swaps. The bank is flat on the floating leg and earns a spread between the two fixed rates. Because banks routinely hold derivatives on their trading books, they are better positioned to manage the accounting treatment.

Intermediated swap structures are well established in other commodity markets. An FCA-regulated BESS benchmark gives dealers a recognised reference to manage their positions against, which is a prerequisite for this kind of intermediation to develop.

Why not just use day-ahead spreads?

Swaps work best when the floating leg tracks what the battery actually earns. The gap between the two is basis risk. If the floating reference is high but the battery's market revenue is low, the asset owner pays a large floating amount while receiving little from the market. The fixed leg does not rescue you from that mismatch. If the battery is offline for a month, for example, the floating leg keeps paying the index while the battery earns nothing. The fixed leg alone does not cover that gap.

A swap referenced to a poor proxy does not deliver fixed revenue. It delivers fixed revenue plus an unpredictable basis penalty. This volatility is exactly what the swap is meant to reduce.

Day-ahead spreads are a decent proxy for battery revenue. They capture the wholesale trading opportunity that drives much of the stack. But they are not a complete picture.

A day with a narrow day-ahead spread can still be a high-revenue day if BM prices spike or frequency response volumes are strong. A day with a wide spread can be a poor revenue day if that spread comes from a single price spike rather than sustained volatility across markets. Intraday prices may not deviate much from day-ahead, the balancing mechanism may be flat, and what looked like a two-cycle day turns out to be a one-cycle day with limited trading opportunity beyond the headline spread.

Remember the basis risk introduced earlier: the shaded gap between the floating reference and actual asset revenue. That gap determines how well the swap provides a stable revenue stream. Using the ME BESS GB Index halves that gap, and reduces basis risk.

For example: over one representative 10-day window of live market data, the average daily basis risk using the index was £29/MW for this two-hour asset. Using day-ahead spreads, it was £61/MW. The index tracks the shape and scale of daily revenue far more closely over longer timescales too.

The FCA-authorised ME BESS GB Index is a better option for regulated financial swap contracts on batteries, due to this reduction in basis risk. Before FCA authorisation, day-ahead spreads were the primary available reference.

What this means for the market

Contract design and counterparty risk management will evolve as more participants engage. Oil, power, and gas all followed the same arc. Bespoke bilateral deals gave way to standardised ISDA confirmations once a trusted benchmark existed. Central clearing and listed futures followed as volumes grew and counterparties diversified. With the ME BESS GB Index now FCA authorised, BESS revenues sit at the start of that same progression.

If you are exploring how to use the ME BESS GB Index in financial agreements, we would like to hear from you. We are running a workshop on this in May. If you would like to be involved, get in touch at zach@modoenergy.com.