Revenues for battery energy storage systems in ERCOT vary substantially year-to-year.
They're influenced by various factors, such as the exponential growth of battery energy storage capacity, the launch of new Ancillary Services, growth in overall load, and unpredictable weather events.
As a result, it's impossible to rely on consistent year-over-year revenues.
This uncertainty in projected annual cash flows makes financing battery energy storage a riskier decision for investors and lenders. So, how can a project’s cash flows be better stabilized?
Owners of battery energy storage systems in ERCOT have begun to enter into bilateral agreements with third-parties to offload this risk. This is a practice that is common in other markets like Great Britain and CAISO.
Frequently, these take the form of a 'tolling agreement', where a third-party 'leases' a battery from an owner. Under this agreement, the third-party keeps the wholesale revenues they earn from operating the battery. In exchange, they pay the owner a flat fee for the privilege to operate the battery.
These agreements may also have slightly different characteristics, resulting in labels such as Storage Capacity or Energy Storage Service Agreements.
How does a tolling agreement impact battery energy storage revenues?
Tolling agreements allow a battery owner to sell the operational rights of their battery to an operator in exchange for a fee.
In a standard tolling agreement, a third-party off-taker pays the battery energy storage owner a flat monthly fee to operate the battery. The off-taker then collects any revenues that the battery earns through wholesale market participation.
In doing so, the off-taker earns revenues by optimizing the battery’s operation, aiming to achieve battery earnings above the agreement’s flat rate - this is the off-taker’s profit.
In exchange, the owner receives reliable and predictable cash flows at the flat rate for the contract period. This provides a path to stable returns that are more favorable to investors and lenders.
This type of bilateral agreement gives battery energy storage system optimizers a faster and less capital-intensive path to market participation.
How many tolling or bilateral operating agreements for batteries in ERCOT have been signed?
To date, only one commercially operational battery in ERCOT is operated under a tolling agreement.
Crossett 1 is a Jupiter Power-owned, 100 MW, one-hour battery that has been operational since May 2022. In June 2023, Equilibrium Energy announced a tolling agreement with Jupiter Power for the operations of Crossett 1.
While Crossett 1 is the only publicly-known asset operating under a tolling agreement in ERCOT presently, there are a number of assets currently in development with publicly announced bilateral operational agreements.
In fact, nearly 2 GWh of battery energy storage capacity is projected to be operating under tolling agreements by the end of 2026.
Equilibrium Energy is the off-take party for the only toll on an actively operating battery in ERCOT, Crossett 1.
Additionally, Equilibrium has announced an agreement with battery owner Ormat Technologies. Under this agreement, they would operate three more battery energy storage systems within a tolling structure.
The three batteries have a reported total capacity of nearly 350 MWh. This would see Equilibrium operating nearly 450 MWh of battery energy storage capacity by the end of 2026, all under tolls.
CPS Energy has also announced bilateral operational agreements with battery owner Eolian. This would give them the right to operate 1.5 GWh of battery energy storage capacity. This capacity is divided between three projects, each projected to be commercially operational by the end of 2026.
Subscribers to Modo’s ERCOT products can continue reading below. Learn more about the individual battery performances at Crossett, the site of the only currently active public tolling agreement in ERCOT.
What has this looked like for battery energy storage systems in ERCOT thus far?
Since Equilibrium Energy began operating Crossett 1 under a toll, its strategy has shifted.
Comparing its revenues and operations to its sister site, Crossett 2, best highlights this.
Crossett 2 sits within the same fence line as Crossett 1. It shares the same rated power, energy capacity, and duration as Crossett 1, but Jupiter Power is still its operator.