Battery storage systems are often perceived as assets that reduce or eliminate risks, but in reality, they are exposed to market risks, like any other assets. Batteries are thriving in markets that see a combination of elevated power prices and high volatility. That, however, means they are exposed to prices and volatility going down.
That is why energy managers such as ENGIE are helping to secure part of the expected battery revenues over a defined period of time using various contract structures. Martin Daronnat, Head of Flexibility & Structured Origination at ENGIE, explains in an interview how flexibility purchase agreements (FPAs) can help finance large-scale storage projects, minimize the associated risks, and increase profitability.
In Germany, hedging is especially important because there are currently no subsidies or capacity markets that provide guaranteed income streams. Batteries here operate entirely on market terms, which means they bear full exposure to price movements. Germany offers the most liquid power market in Europe, both in the intraday segment and in long-term market segments. This liquidity allows market participants to hedge their exposure effectively, either directly in the market or within their own portfolios, especially if they already manage renewable generation or have clients with hourly price exposure.
This ability to hedge is what enables utilities and traders to offer long-term fixed-price flexibility purchase agreements (FPAs) in Germany. FPAs involve purchasing flexibility, meaning the ability to charge and discharge, from a flexibility provider to better balance energy supply and demand or optimize grid costs. Due to their potential and complexity, FPAs are currently a hot topic in the energy sector.
The main trend is not so much about how much you hedge, but rather how you achieve the desired level of risk exposure. So, the contracts structures really matter. Similarly to PPAs for Renewables, FPAs can have several structures: physical, virtual or even fully financial. They remain nonstandard and complex deals that can take months to negotiate.
A physical FPA involves a direct optimization of a specific battery asset. It’s tangible and operationally tied to the particular site of the battery. A virtual FPA, on the other hand, is rather based on a portfolio approach, which means you don’t link the contract to a specific asset but to a pool of flexible assets. Financial structures, such as hedging products or price swaps, allow parties to manage exposure purely on a financial level, without any physical delivery. On top of these contractual structures, one important question is the price structure: fixed-price, partial fixed-price, or fully merchant.
When the storage market was still young and projects rather small, most contracts were merchant, but as projects have grown in scale and financing needs have become more complex, we see more fixed-price structures emerging. Fixed-price FPAs are the new contract models to finance BESS at the moment.
In the agreements we typically sign, ENGIE pays a fixed price to the client in exchange for the right to use the asset’s flexibility, whether physical or virtual. We are also developing financial products which we aim at exchanging with downstream clients, utilities and traders, to sell them flexibility and manage our exposure.
One of the central principles of our contracts is clear risk distribution: The technical risk remains with the client. For example, if the battery is unavailable, we don’t pay for that period. Conversely, if the client achieves better technical performance, they benefit from it. The market risk is fully borne by ENGIE. We typically pay the agreed fixed price regardless of market fluctuations.
A particularly important topic in physical tolling contracts is battery warranty risk. If an optimizer operates the battery incorrectly, for example by sending the wrong setpoints, it can void the manufacturer’s warranty or even damage the asset. Given that large-scale batteries can represent investments of several hundreds million euros, such a mistake can have enormous financial implications. Working with creditworthy partners becomes a must for lenders to avoid ending up with a broken asset with no possibility of claiming damages.
Virtual FPAs structures carry less operational risk for the offtaker. In those models, we don’t physically control the battery. We simply contract for a certain volume of flexibility at portfolio level, and the client manages the physical asset dispatch.
Last year, we signed Germany’s first long-term physical FPA for battery storage with more than 100 MW capacity over seven years. At this size, it’s also among the largest physical flexibility contracts in Europe. This type of contract is significant because ENGIE steers the battery directly.
Structurally, physical FPAs resemble PPAs plus an optimization agreement. Essentially, we contract for the flexibility of the asset first and then embed an optimization agreement to manage it efficiently. FPAs are generally complex, but this specific structure pushes all complexity towards the offtaker, which is why physical contracts are still rare in Germany, despite being simpler for sellers. Another reason for their scarcity is technical capability. Many players can price contracts or optimize portfolios but cannot connect directly to the asset. This may be due to legacy utility systems, lack of infrastructure, or teams that aren’t equipped to manage third-party assets. This first deal represents a major milestone in demonstrating that such complex structures can be successfully executed in Germany.
It largely depends on the type of contract. In fixed-price agreements, most risks are clearly allocated between the parties, which is the main advantage of such structures. In contrast, under a fully merchant contract, the client assumes all market risks, as well as the performance risk of the optimizer. In that case, the optimizer simply provides a service and carries no financial exposure, so the discussion about risk allocation becomes almost redundant.
In fixed-price or partially fixed-price deals, however, risk allocation must be carefully defined. Typically, the trader or offtaker takes on market risk, while the client retains technical risk related to asset performance. The remaining categories, such as regulatory risk, dispatch risk, or grid-related risk, are negotiated individually and can vary from deal to deal, even with the same client.
The key is to ensure that a fixed-price contract is well structured from the outset. If it’s not, unexpected issues can arise later. For example, changes in grid ramping rules or new electricity taxes can suddenly shift financial exposure back to the client.
