Lenders underwrite cash flows, and for an uncontracted battery those cash flows come from a stack of market revenues — energy arbitrage, ancillary services, and sometimes capacity payments — whose prices move hourly and whose capture depends on dispatch, availability and degradation. The lender can model those revenues, but the borrower cannot control them. That gap is what a battery storage tolling agreement is designed to close, one of several structures that move price risk to a counterparty: the offtaker takes dispatch rights and market exposure, and the owner collects a fee tied to availability. Who carries the market risk, and what the contract does with it, remains the central question of battery storage financing.
What a Lender Is Underwriting
For a standalone battery, the uncontracted revenue forecast is several forecasts stacked together. Wholesale arbitrage depends on the spread between low and high prices rather than on the absolute level of either. Ancillary services revenue depends on the grid’s requirement for frequency response and reserves, and on how the battery is dispatched to provide them. Capacity payments, where they exist, depend on the market’s reliability mechanism and the project’s eligibility under its rules. Each line carries its own price risk and its own performance requirement, as described in the day-to-day economics of battery storage.
A lender can accept a revenue curve that is probable, but a long-term loan usually requires at least part of the revenue to be fixed by contract. The borrower’s control over dispatch and maintenance can reduce operational risk, but it cannot remove the hourly price risk of the merchant market. That is the risk the three contract structures below are designed to allocate.
Three Ways to Allocate the Revenue Risk
Three structures move the same risks in different directions: fully merchant exposure, a tolling agreement, and a floor-and-cap or contract for difference.
Under a fully merchant approach, the owner keeps every market revenue line and every price risk. Dispatch control stays with the owner, which means the battery can chase the highest-value hours but also carries the full consequence of missed forecasts. Degradation exposure sits entirely with the owner, because no toller pays for cycling or efficiency loss. There is no availability obligation to a counterparty, but there is also no fixed payment that a lender can count on. This structure suits developers with strong balance sheets or a hedging strategy, and it is the baseline against which tolling is compared.
In a tolling agreement, a toller pays a fixed or indexed fee for the right to dispatch the battery. The toller takes the merchant price risk, because it decides when to charge and discharge and collects the spread or ancillary payments from the market. The owner retains the performance risks that degrade the asset: availability, round-trip efficiency and cycling limits, each defined in the contract. For a toller, the battery is a source of dispatchable capability in the markets from regulation to black start, and the tolling fee is the price of that capability.
A floor-and-cap or contract-for-difference arrangement fixes a revenue band rather than transferring dispatch control. The owner continues to dispatch the battery, but if market revenue falls below the floor the counterparty pays the difference, and if it rises above the cap the owner pays the excess. Price risk is shared, while dispatch control and degradation exposure generally remain with the owner. Availability obligations may appear only as conditions for the floor payment, not as the core revenue right. This structure is common when the offtaker wants renewable-linked or reliability-linked revenue certainty without taking over dispatch.
The Clauses That Decide Who Carries What
The toll level is the fixed or indexed payment per megawatt-month, per available hour, or per dispatch instruction. It sets the baseline revenue the lender can apply to debt service, so it is usually the first clause negotiated. Escalation may be linked to inflation, a fuel index, or a market benchmark, and it determines how much of the price risk stays with the toller over time. A low toll transfers less revenue risk to the counterparty, but may not generate enough contracted cash flow to support the project’s debt.
Most tolling agreements include an availability guarantee that defines the percentage of time the battery must be capable of dispatch. If the owner fails to meet the target, liquidated damages reduce the tolling fee. That clause converts operational risk into a measurable cash-flow risk, which is why lenders review it closely. The damages are usually calculated to compensate the toller for the market revenue it could not capture, rather than to penalise the owner beyond that loss.
Round-trip efficiency adjustments allocate the energy lost between charging and discharging. A battery that draws more energy than it returns creates a cost, and the contract decides whether the owner or the toller bears that loss above an agreed threshold. The owner typically carries degradation-related efficiency losses, while the toller may carry losses from dispatch decisions it made. These mechanics sit alongside long-duration energy storage technology comparisons, because cycle life and efficiency differ by chemistry.
Cycling limits cap the number of charge-discharge cycles per day, month or year. Exceeding the cap accelerates degradation, and the contract states who pays for the additional wear: either the toller pays a cycling fee or the cap is treated as an availability breach. The owner prefers a tight cap to preserve the asset’s life, while the toller wants enough flexibility to capture high-value hours. The negotiated cap is therefore a direct split of the battery’s physical life.
Who buys the charging energy is a separate clause from the tolling fee. The toller may buy charging energy itself and treat it as a cost of participating in the market, or the owner may supply it and receive reimbursement at an agreed index. Station-service load — the electricity the battery consumes for cooling, controls and auxiliary systems — must also be assigned, because it reduces the net energy the toller can sell. Leaving either point silent is a common source of post-financial-close dispute.
The term of the tolling agreement generally needs to match or exceed the tenor of the project debt. If the toll ends before the loan, the lender is left with the merchant revenue profile for the remaining term, which it may not have underwritten. Some projects manage this with a shorter toll and a refinancing plan, but that introduces rollover risk. Lenders therefore read the toll term and the debt amortisation schedule together.
The Tolling Trade and the Cost of Capital
The toller accepts a fee below what it expects the battery would earn as a merchant plant because the contract makes the project financeable at a lower cost than an uncontracted revenue profile would support. The lower financing cost can more than offset the fee, and the toller gains dispatch rights without buying the asset. For the owner, giving up merchant upside is the price of replacing a forecast with a contractual cash flow. This is the same trade that appears in other capital-intensive storage assets, such as pumped storage hydropower.
The precise split depends on the market’s volatility and the battery’s dispatch flexibility. In a market with deep and frequent price spreads, merchant upside is high and a toller may demand a larger discount. In a market where ancillary service prices dominate, the tolling fee may be set by the value of guaranteed availability rather than expected arbitrage. The contract does not create the underlying market value; it allocates which party bears the uncertainty around it.
How Asian Market Rules Shape the Contract
According to a Borderless Business Law Office battery investment guide, Japan’s Long-Term Decarbonization Power Source Auction offers capacity revenue for, in principle, 20 years, but successful bidders must refund 95, 90 or 85 percent of other-market profit depending on its level. A battery with that capacity payment has a fixed revenue floor, but most of its merchant upside is recaptured by the auction rules. A toller or financier working with such a project has to model the revenue net of the refund rather than the gross market revenue.
The same guide reports that storage accounted for 24,862 of Japan’s fiscal year 2025 grid connection study applications, or 86 percent of the total. That concentration explains why the grid side now receives as much attention as the revenue side. A cap on the number of connection studies per applicant took effect on August 1, 2026, and measures addressing charging-side grid congestion changed development assumptions. A project that cannot secure a connection study or that faces charging restrictions may not reach the point where a tolling agreement can be signed.
Merchant arbitrage is only one part of the Japanese revenue picture. A wholesale market revenue line is JEPX arbitrage — charging when prices are low and discharging when prices are high — while the behind-the-meter or co-located model installs the battery alongside solar or wind to reduce curtailment and imbalance costs. That co-located structure changes the contract design, as discussed in why co-locating solar and storage changes economics, because part of the battery’s value is internal to the generation asset rather than captured through the market.
Other Asian markets shape the same contract question through their market designs. In Korea, where the wholesale market is organised around a centralised bidding system, the applicable market rules and asset configuration determine how dispatch and settlement are treated, and this shapes how a standalone battery’s revenue line can be structured. Taiwan has developed frequency-regulation products such as e-dReg that reward fast response, and contract design often centres on availability rather than energy arbitrage. India has run battery tenders that use availability-based or capacity-plus-energy structures, making the offtake terms more decisive for bankability than the spot market.
What a Lender Requires Before Financial Close
Before financial close, a lender withholds funding until several conditions are documented. The contracted revenue must be sufficient to cover debt service under the lender’s downside case, not just the base case. The toller’s credit must be acceptable, because the contract is only as strong as the counterparty that signs it. The performance obligations, charging energy allocation and cycling limits must be defined clearly enough to model. Where the contract and the applicable market rules conflict, the outcome generally depends on the jurisdiction and tariff, and lenders typically require that any conflict be identified and resolved before financial close.
A tolling agreement can address market price risk, availability risk, degradation allocation and charging energy cost. It cannot remove construction risk, grid connection risk, or the risk that market rules change after signing. It also cannot turn an uneconomic tolling fee into a bankable revenue stream; if the fixed payment is too low, the contract simply locks in a shortfall. The lender’s final test is whether the contract makes the cash flows stable enough to repay debt under realistic operating assumptions.
References
- Borderless Business Law Office — Battery Investment Guide 2026 — Japan battery investment, grid connection study application figures, LTDA capacity revenue and clawback terms, JEPX arbitrage and co-location model.
- InfoLink Group — Energy Storage Topic: Japan’s Energy Storage Policy Trends — policy context for Japan’s storage expansion and auction framework.
