We recently ran an industry workshop on how the FCA regulated ME BESS GB Indices could be used within a revenue swap, following on from this article on the subject.

This article is the follow up to that workshop, and contains the draft Heads of Terms that could be used in conjunction with an ISDA arrangement to contract such a swap.

It also shows the advantages in using the ME BESS GB index as a floating leg for a swap, as opposed to using the Day-Ahead spread. Basis risk is reduced.

A swap could be used as an alternative way of financing an asset

For an asset to be financeable, it usually requires some form of contracted long term revenue. Standard ways of contracting revenues for a utility-scale battery asset in GB are floors and tolls. A swap could be another way to contract revenues for a single asset.

The breakdown of revenues between asset owner and optimiser for a fully merchant case, a floor, a toll and a swap is shown in the chart and can be compared to the fully merchant case (in which there is no long term structured contract in place).

A toll gives the asset owner total security - it receives a flat price over the duration of the contract

There is no volatility in the revenues the owner receives. The asset owner essentially rents the asset to an operator, who pays the flat fee - and the operator will keep any upside on the toll level. This means the operator is incentivised to make as much money from the asset as possible. The asset owner could sacrifice overall revenue level for stability.

A floor gives asset owners exposure to asset revenues, while guaranteeing a minimum revenue (the ”floor”)

The floor acts like an insurance policy for when market conditions are poor for BESS. Because optimisers may need to pay out more than they get from the asset during low yield periods, they typically require a higher revenue share (the chart shows 15%, vs a 5% revenue share for the fully merchant case). This structure means they are exposed to the upside and therefore incentivised to operate the asset in a profitable way. Other than fully merchant, a floor typically returns the most volatile revenues over a long term period.

A swap uses an external index as a reference for the asset revenue, which is swapped with a third party for a fixed revenue

The asset owner is exposed to asset revenues above or below that reference, or floating, index. The choice of index - and how it relates to the asset revenue - is key to the understanding the volatility in the net asset revenues to asset owners. Basis risk describes the difference in asset revenue and the floating index. Assuming the index shows ‘good’ correlation with the asset revenues (and therefore the basis risk is ‘low’), net revenue for the asset owner should be less volatile than a floor and more volatile than a toll.

A swap is a purely financial product

While swaps can be used to directly finance a battery asset, we anticipate them being a secondary traded product on top of existing financing structures, or battery portfolios. They allow the volatility that battery revenues innately have - and the risk this represents - to sit with a counterparty who can best manage it.

A counterparty with a renewable portfolio that wants exposure to battery revenues - as they act as a natural hedge to a wind or solar portfolio
A counterparty with a supply portfolio that wants exposure to battery revenues - as they similarly act as a natural hedge for when spot prices increase
A counterparty with an over-exposure to battery revenues wants more stable returns

For buyers of the floating leg who want exposure to BESS revenues, it is much simpler, quicker (and potentially cheaper) to negotiate a swap, than to build an in-house optimiser and win a tender with an asset owner to optimise a physical battery asset. Similarly, for sellers who have a large exposure to volatile BESS revenues, negotiating a swap could be quicker and easier than alternative ways of reducing exposure - like selling assets.

As a purely financial product, no detail of the physical asset operations is necessary - or indeed wanted. Traders of these derivative products do not care about the warranty of a battery site or any availability considerations; they care about the level of the fixed and floating legs, and impact on their P&L. This also means the parts of a floor or toll which can take a long time to negotiate (for example clauses around availability, cycling, warranty, performance) are not needed - making the swap much faster to negotiate and contract between counterparties as compared to a floor or a toll.

These physical characteristics are purposely omitted from the draft Heads of Terms.

Floating leg: DA spread or the FCA regulated ME BESS indices?

The chart shows one individual asset’s revenue between Dec 2024 and April 2026 - here, Wormald Green. This is a 33MW, 66MWh battery owned by Foresight and operated by bp. Asset revenues are taken from the Modo Energy GB asset operations data. We compare to two floating legs: the ME BESS GB 2h index, and the more established index which is set by the Day Ahead spread.

The difference in asset revenue and the floating index is the basis risk. For the swap where the ME BESS GB 2h index is the floating leg, there is a mean difference of £5.7/MW/year with Wormald Green’s revenue. If the floating index is the Day-Ahead 2h spread, the difference is £29.5k/MW/year. This Day-Ahead spread is set as the difference between the 2 minimum and 2 maximum hours of the day ahead hourly price (also known as the ‘TB2’).

For this one asset, there is substantially more basis risk using a day ahead spread for the floating leg of a swap. It is also worth noting that the fixed leg of the swap in these two cases should be different.

We also look at the difference in using the ME BESS GB 2h index and Day-Ahead spread for a portfolio of assets: EDF Energy’s 2h portfolio of operational assets, containing 24 assets. Here, the basis risk varies from -£14.1k to £6.4k over the period using the ME BESS GB 2h index - and £+2.3k to £+24.8k using the Day-Ahead swap.

Download the draft Heads of Terms

Contracted under an ISDA agreement, a swap could be negotiated very quickly. The draft heads of terms we publish here is intended to be used by industry as a starting point for such a contract, and is should not be taken as final or legally binding.