Battery energy storage systems (BESS) are central to Europe’s energy transition. They provide flexibility, support renewables, and are increasingly attractive to investors. In Belgium, Germany, the UK, and the Nordics, projects are scaling rapidly. But for investors, one question dominates: Merchant or contracted revenues – which model carries the right balance of risk and reward?
It’s rarely black or white. While merchant and contracted revenues each have clear advantages, the most effective strategies often combine elements of both. That’s where we come in: we design solutions that bridge the two models, helping investors capture upsides while safeguarding stability.
At Centrica Energy, we can help assist you through three different models including their upsides and risks:
- Merchant Exposed Revenues
- Contracted Revenues
- Hybrid models
Let’s have a look at the first model.
#1: Merchant Revenues Explained
Merchant revenues come from direct exposure to wholesale, ancillary services, and imbalance markets. Batteries buy when prices are low and sell when high and deliver flexibility to stabilise the grid.
Investor lens: Merchant models can potentially offer a higher upside, but they come with associated risks.
Risks involved:
- Market volatility: An important part of the revenues depends on wholesale/imbalance price spreads, which can collapse when renewables, gas, or interconnectors shift.
- Regulatory changes: Ancillary service designs and imbalance price caps are subject to reform.
- Revenue concentration: Heavy reliance on one market (e.g. frequency control) exposes assets to saturation risk.
- Saturation of ancillary services: The supply of certain ancillary services meets or exceeds the system operator’s demand, often leading to reduced prices, lower revenues for providers, and limited opportunities for new entrants.
- Financing hurdles: Lenders may demand higher equity or guarantees to account for volatility.
#2: Contracted Revenues Explained
Contracted revenues stem from full/partial tolling agreements to floors plus revenue share. These structures help fix or maintain a minimum income stream, reducing exposure to market uncertainty. They are often referred to as “non-merchant exposed revenues”.
Investor lens: Contracted models help deliver potentially stable cashflows and support financing, but returns can be limited since the market risk is outsourced to the Optimiser.
Risks involved:
- Lower upside: Reduced exposure to price spikes or scarcity events.
- Counterparty risk: Long-term contracts depend on the financial stability of the buyer.
- Lock-in risk: Contracts can reduce strategic flexibility if market conditions shift.
- Opportunity cost: Fixed structures may underperform relative to merchant models over time.
#3: Hybrid and Advanced Models
The market increasingly favours hybrid strategies. Investors seek bankability with upside, combining tolling with merchant exposure.
Hybrid Products at Centrica:
- Partial Tolling: Split your BESS – one part under toll, one part merchant exposed. This can help secure debt financing while keeping exposure to potential market upside.
- Financial Swaps: Add flexibility to merchant contracts, help maintain a minimum value in weak market conditions, while giving some exposure to the upside in stronger markets.
Risks involved:
- Structuring complexity: Requires careful allocation of revenues, responsibilities, and optimisation rights.
- Operational coordination: Assets must be managed across both contracted and merchant layers without conflict.
- Legal clarity: Contracts must avoid ambiguity between tolling and merchant optimisation rights.
Conclusion: Tailored Products for Investors
There is no universal answer to the merchant vs contracted debate. Each model comes with its own risks and rewards. What matters is having access to flexible solutions that fit investor profiles and project financing needs.
At Centrica, we offer:
- Merchant optimisation with audited track record since 2018. Full tolling agreements for stable returns.
- Partial tolling solutions allowing BESS to split between contracted and merchant exposure.
- Financial Swap products based on wholesale markets like the Day-ahead that help provide a minimum value under low market conditions, while still preserving some upside potential in stronger markets.
With more than 500 MW optimised, externally audited and certified, we can assist investors choose the right model for their projects.
|
Revenue Model |
Upside |
Downside / Risks |
|
Merchant exposed “Revenue share” |
Capture wholesale, ancillary services, imbalance spreads
Flexibility to adapt to price spikes |
High volatility
Sensitive to regulation & spreads
Harder to finance with senior debt |
|
Non-merchant exposed /Contracted “100% Tolling” |
Predictable, stable cashflows
Easier project financing & credit rating support
Reduced exposure to market risk |
Lower returns
Counterparty & lock-in risk
Limited upside in high-price events |
|
Hybrid / Partially exposed “Partial Toll + revenue share” |
Split your BESS: one part under toll, one part merchant
Bankable cashflows + merchant upside
Attractive for project finance |
Structuring complexity
Operational coordination risk |
|
Advanced Merchant Options (e.g., FinancialSwaps) |
Add flexibility to merchant contracts
Help lock in a minimum value in weak market conditions
Stay exposed to upside when spreads improve |
