What is a Tolling Agreement?
The term “tolling” derives from the word “toll”, originally meaning a fee, charge, or, in the industrial field, the compensation paid for the use of a processing facility. A tolling agreement, therefore, is a contract whereby one party, the owner of the raw material, entrusts another party, the owner of the facility, with the processing of such material while retaining ownership over it.
In the context of generation or cogeneration facilities, the tolling agreement is structured as a contract pursuant to which one party, known as the toller, supplies the raw material (typically, the fuel) to another party, known as the processor, who owns the facility. The processor, by using the raw material provided by the toller, produces electricity and thermal energy, which will subsequently be returned to the toller against payment of a fee.
More recently, market operators have extended the application of the tolling agreement to energy storage systems (“Tolling Agreement”). In this context, the Tolling Agreement is structured as a contract pursuant to which the owner of the storage facility, referred to as the asset owner (“Asset Owner”), makes the facility's storage capacity available to another party, the toller (“Toller”), enabling the latter to inject, store, and withdraw electricity from the storage facility at its own discretion, against payment of a fee to the Asset Owner for the availability of such capacity. The Toller retains exclusive ownership of all electricity injected, stored, and withdrawn from the facility throughout the term of the Tolling Agreement.
Under a Tolling Agreement relating to storage systems, therefore, there is no supply of raw materials nor any electricity generation activity. Instead, the storage facility is made available to the Toller to enable it to store electricity and subsequently sell it to the market according to its own strategies.
The Rationale behind the Tolling Agreement
Through the Tolling Agreement, the parties aim to allocate the risks and responsibilities associated with the construction and subsequent operation of the storage system.
Going into detail:
(i) the Asset Owner undertakes to construct and commission the facility within a certain term and to make its storage capacity available to the Toller. Upon commissioning, the Asset Owner remains responsible for the maintenance, availability, and management of the facility for the benefit of the Toller, receiving from the Toller a fee ensuring the Asset Owner's cash flow, which may be necessary to fulfil its obligations under any project financing agreement (if any); while
(ii) the Toller undertakes to use the facility in accordance with the operational cycles and procedures set forth in the Tolling Agreement, having the right to store electricity at its discretion. With respect to the storage facility, the Toller does not assume any construction or maintenance risk.
Tolling Fee Structure
As outlined above, the Toller pays the Asset Owner a fee to compensate the availability of storage capacity.
The fee may be determined according to different models:
(i) fixed fee – a set amount in Euro per MW of capacity made available under the Tolling Agreement. While the fee is fixed, the parties may however agree on adjustment mechanisms to account for actual availability and efficiency of the facility during the relevant period;
(ii) variable fee – an amount in Euro per MWh of energy injected and stored in the facility during a reference period. This variable fee may be the sole form of compensation or in addition of the fixed fee;
(iii) revenue sharing – a percentage of the profits generated by the Toller through optimization activities, including participation in electricity markets, allocated to the Asset Owner. This can be structured as the sole compensation or as a supplement to the fixed and/or variable fees. Revenue sharing may apply starting from the effective date of the obligation to make capacity available and pay the associated fee, or even earlier if the facility becomes operational before such obligations commence.
The Relationship between the Tolling Agreement and the Capacity Market
The obligations of the parties under the Tolling Agreement, as well as the remuneration mechanism addressed above, may become more complex in case the Asset Owner intends to participate in the capacity market with the same capacity made available to the Toller under the Tolling Agreement.
The capacity market, as set forth in Article 1 of Legislative Decree No. 379/2003, as subsequently amended, is a market organized and operated by Terna, based on the capacity made available in favour of the electricity system. Such market purposes to ensure adequacy of the available generation capacity within the electricity system, also guaranteeing the continuous satisfaction of national electricity demand with adequate reserve margins.
This market is structured as a system of auctions (so-called procedure concorsuali) aimed at determining the capacity commitments undertaken by each market participant. At the conclusion of such auctions, the successful bidders are required to enter into an agreement with Terna (“Capacity Market Contract”). Pursuant to this agreement, the awarded participant – that we assume to be the Asset Owner – undertakes to make the awarded capacity available to Terna, and to enhance the corresponding electricity volumes on the electricity market through the Toller, against a consideration paid by Terna to the Asset Owner. Such consideration consists of both a fixed and a variable component.
In light of the foregoing, and considering that the storage facility’s capacity is managed and enhanced by the Toller, the coexistence of the Capacity Market Contract and the Tolling Agreement requires that the latter also govern the additional commitments in this regard of the Asset Owner and the Toller. Furthermore, the Tolling Agreement shall address a flow structure and compensation framework that properly reflects the more complex legal and factual context related to the storage facility owned by the Asset Owner in this situation.
Indeed, the Toller, also acting as the dispatching user of the facility, will be responsible for the injection and withdrawal of electricity from the storage facility, for managing the facility’s availability, as well as for submitting offers in the electricity market.
More specifically, with respect to participation in the capacity market, the Tolling Agreement shall govern:
(i) the participation in the Auction Procedures, possibly restricting the Asset Owner’s ability to participate in certain auctions depending on the different delivery periods;
(ii) the Asset Owner’s undertaking not to participate in the Mechanism for the Procurement of Electric Storage Capacity (“MACSE”)[1], nor in any other mechanisms, including incentive schemes, and/or in any market that could be incompatible with the commitments undertaken under the Tolling Agreement and the Capacity Market Contract;
(iii) the specific obligations that the Toller must undertake in order to enable the Asset Owner to comply with the obligations assumed under the Capacity Market Contract;
(iv) the allocation of the risk associated with the variable fee to be paid to the Transmission System Operator in the event that bids are executed at a price higher than the strike price;
(v) the contractual remedies applicable in the event the Asset Owner fails to comply with its obligations under the Capacity Market Contract, where such failures are attributable to acts, omissions, or defaults of the Toller under the Tolling Agreement.
In general, the Toller shall have the right to dispatch the facility, at its own discretion, on all available markets, provided that participation in such markets remains compliant with the Capacity Market rules and does not adversely affect the Asset Owner’s participation therein.
The above and other aspects related to investments in Storage and the associated cash flows in the context of bankability will be discussed with our guests at the conference BESS: profili di bancabilità tra regole e mercato, to be held at our Milan office. Through the link you can register. Places are limited and we suggest you register as soon as possible.
[1] The MACSE was introduced by ARERA Resolution No. 247/2023, implementing Article 18 of Legislative Decree No. 210/2011.
