Co-authored by Shalini Uthayakumaran, Senior Associate, Courtney Tillman, Associate, and Jett Lobb, Solicitor
* Battery energy storage systems (BESS) projects in the National Electricity Market (NEM) have evolved – from being focussed on frequency control services and grid stability, to generating new value streams from arbitrage and firming.
* Offtake agreements have become more sophisticated, shifting from physical tolls to virtual tolls, revenue swaps, synthetic hedges, and firmed PPAs which provide bankable revenue for developers that also facilitate value stacking.
* Government schemes like the Capacity Investment Scheme and Long-Term Energy Service Agreements have been critical enablers, providing revenue certainty and underwriting merchant risk for longer-duration and socially responsible storage projects.
* Contracts have also matured to address new and complex legal and commercial risks, particularly around performance guarantees, degradation, market disruption events and the SOCI Act.
* The NEM’s design and volatility supports continued innovation, enabling the entry of new buyer profiles and creative contract layering, making strategic navigation of BESS offtake structures essential for long-term success.
Offtake agreements for BESS projects: Structuring the next wave
Battery energy storage systems (BESS) are no longer a niche asset class in the National Electricity Market (NEM). As the market continues to transition away from thermal generation towards variable renewables, BESS projects are emerging as critical infrastructure. This is not only for grid stability and frequency control, but increasingly for arbitrage, firming and portfolio optimisation. The shift is driving a new generation of offtake agreements that are more sophisticated, diverse and commercially nuanced than their predecessors.
Early BESS projects
The early wave of BESS projects in Australia was largely anchored in Frequency Control Ancillary Service (FCAS) markets, with system strength and security contracts providing a stable revenue base. These arrangements, often procured by State governments or network operators, helped establish the technical and commercial viability of grid-scale batteries. However, as market dynamics shifted, so too did the revenue stack. Today, arbitrage and margin-making are increasingly central to the business case for BESS, particularly in a market characterised by deep price volatility and the exit of coal-fired generation. This shift has prompted a rethinking of offtake structures, which we examine in this article.
The first wave: from physical tolls to virtual tolls and beyond
Physical tolling agreements, once the dominant model, are now being supplemented, and in many cases replaced, by virtual tolls, revenue swaps, synthetic hedges and firmed power purchase agreements (PPAs). In a physical toll, the offtaker assumes full operational control of the BESS, often becoming the Financially Responsible Market Participant for the asset, managing dispatch directly, and being exposed to the market. These contracts are well suited to vertically integrated parties seeking to hedge their load or consumption, (e.g. retailers and large industrials). However, physical tolls are misaligned with the operational and commercial realities of modern BESS projects. The ability to stack value across arbitrage, FCAS, firming and local network services is now central to the commercial viability of BESS assets, yet physical tolls transfer control of the asset to the offtaker, preventing developers from optimising across multiple revenue streams or adapting dispatch strategies as market conditions evolve. Physical tolls can also trigger lease accounting issues, requiring offtakers to recognise the asset and corresponding liability on their balance sheet, which creates regulatory capital complications, particularly for retailers. Additionally, the complex operational requirements of batteries creates performance risks for offtakers that lack specialised battery management expertise. These limitations have driven the market towards more flexible structures that preserve developer control whilst still providing bankable revenue.
Virtual tolling structures address these concerns by decoupling physical operation from financial settlement. Under a virtual toll, the asset owner retains full operational control of the BESS, while the offtaker nominates dispatch windows or shapes which the asset owner is not obliged to follow, but likely would. Financial settlement is then based on the nominated volumes and actual spot prices. This structure helps generate bankable revenue for developers that can be used to balance other value streams such as merchant revenue. Virtual tolls are also gaining traction among retailers and traders seeking flexible access to battery functionality without assuming the operational responsibilities.
Revenue swap/share agreements represent another layer of innovation. Under these structures, offtakers pay a fee in return for an agreed percentage of the asset’s total market revenue. These contracts uniquely align the parties’ incentives as they must agree on how the asset will be operated, which supports collaborative optimisation and is particularly effective for projects where dispatch decisions are complex or where co-optimisation with other assets is required. This innovation directly addresses the challenge of monetising BESS value stacking capabilities whilst providing developers with predictable revenue streams that enhance project bankability and financing terms. Firmed PPAs and synthetic hedges are also emerging, especially in hybrid projects combining solar or wind with storage. These structures enable batteries to deliver firmed output, often via time-of-day swaps or contracts-for-difference, and are increasingly sought by buyers pursuing 24/7 carbon-free energy strategies. These structures not only help create more bankable projects by establishing consistent and reliable revenue streams, but also enable lenders to better assess and price the diverse revenue opportunities inherent in BESS assets, ultimately improving debt capacity and financing terms for developers.
Government schemes help smooth the troughs
Government-backed schemes such as the Long-Term Energy Service Agreements (LTESAs) and the Capacity Investment Scheme (CIS) have played a critical role in enabling longer-duration storage. These frameworks have been instrumental in establishing market certainty by providing underwriting for merchant risk and supporting financing by offering revenue certainty over extended tenors, thereby creating a foundation for more sophisticated and bankable offtake structures. The Griffith BESS, for example, was purposefully developed as an eight-hour system and commercialised through an LTESA, reflecting the growing appetite for duration diversity and the importance of location-specific value.
Recent developments in government-backed schemes have further strengthened market certainty for developers and financiers. The fourth round of the CIS, concluded in October 2025, awarded 6.6 GW of renewable capacity, including 3.5 GW / 11.4 GWh of storage across 12 hybrid solar and wind projects. The CIS agreements for these projects incorporate innovative features such as revenue-sharing with First Nations communities, community energy rebates and local steel sourcing commitments, reflecting a growing emphasis on social licence and ESG-linked obligations within offtake contracts. New South Wales and Queensland have emerged as leaders in government-underwritten BESS capacity, with NSW accounting for 45 percent of awarded storage. Victoria is catching up though, having secured the most capacity under the CIS Tender 3 for NEM Dispatchable Capacity that was awarded in September 2025. These developments underscore the importance of aligning offtake structures with state-based planning frameworks and Renewable Energy Zones (REZs), as well as the increasing the role of government tenders in shaping market dynamics.
Riding the wave: Contracts evolve with the market
Legal protections within BESS offtake agreements are becoming more sophisticated as storage assets take on more significant roles in grid stability and market operations. Performance guarantees around availability, round-trip efficiency and dispatch reliability must be clearly defined and tested. Charging energy and station load allocations require careful drafting to ensure clarity on energy losses and degradation risk. Termination, force majeure and change-in-law provisions are essential in managing regulatory uncertainty, particularly in light of the Security of Critical Infrastructure Act 2018 (SOCI Act), market disruption events and evolving NEM rules. As BESS assets interface with critical infrastructure and high-value trading strategies, disputes over performance, dispatch rights and market exposure are likely to increase, making robust legal protections a priority. Lenders are also increasingly scrutinising contractual provisions when assessing revenue certainty, risk allocation and security packages, directly impacting financing terms, debt capacity and pricing.
Recent market activity illustrates the sophistication of BESS offtake arrangements:
* Akaysha Energy’s 12-year Virtual Tolling Agreement with EnergyAustralia for the Orana BESS is layered with an LTESA, enabling dispatch rights over a 200 MW virtual battery.
* Pacific Green’s framework agreements with ZEN Energy and Re2 Capital span tolling and revenue swap structures across multiple projects, supporting portfolio-level underwriting and industrialisation of development processes.
* Quinbrook’s multi-stage offtake with Stanwell for the Supernode BESS demonstrates how state-owned utilities are supporting grid reliability through long-tenor contracts.
* Altech’s defence-sector offtake with Axsol highlights the role of non-lithium technologies and non-grid applications in expanding the scope of BESS contracting.
The next wave: Emerging trends
Arbitrage revenues in the NEM surged 97 percent year-on-year, now comprising 60 percent of project revenues and overtaking FCAS as the dominant value stream. While FCAS islanding in South Australia and Queensland continues to drive regional uplift, its long-term sustainability remains uncertain. Cap contracts are emerging as tools for traders to manage volatility, particularly in states with high contingency pricing. Banks are increasingly funding merchant-exposed BESS projects such as Bungama and Calala, reflecting a shift in lender risk tolerance. MUFG and SMBC have backed large-scale batteries with flexible revenue models, including partial merchant exposure and synthetic hedges. This trend signals growing confidence in the commercial viability of BESS assets and the maturation of financing structures in this evolving market.
These deals also reflect a broader trend toward portfolio optimisation. Developers are increasingly adopting revenue-led approaches, engaging early with offtakers to shape project design and optimise risk-adjusted returns. This strategy supports infrastructure-grade financing and enables more competitive delivery, particularly as battery costs continue to fall and technology improves. The ability to stack value across arbitrage, FCAS, firming and local network services is now central to the commercial viability of BESS assets. In some cases, developers are combining multiple offtake structures within a single asset, for example, tolling a portion of capacity while retaining merchant exposure on the remainder, to balance debt and equity requirements. However, offtakers are equally seeking to protect their position by imposing covenants under offtake agreements to either restrict further encumbrance of the underlying asset to additional offtakers or insisting on a right of first offer to any additional capacity.
Asset owners seeking to enter into multiple offtake agreements in respect of one asset, particularly with offtakers that are competing market participants, will need to ensure that any such novel arrangements are cleared from a competition law perspective. Such laws may be triggered, for example, due to the need for the asset owner to reconcile instructions from different offtakers. Deciding ultimately to preference one offtaker over another may contravene cartel and concerted practices laws. Equally, the next generation of offtake contracts may see developers stack multiple assets under one agreement to reduce operational risk, deliver higher performance guarantees and reduce downtimes associated with outages or maintenance. Consideration will need to be given to the additional regulatory regimes that are triggered by these novel structures.
When the tide comes in…
The NEM’s structural characteristics support continued innovation in BESS offtake structures. Its volatility provides strong investment signals, while its relatively simple market design allows for creative layering of contracts. The emergence of virtual tolls, synthetic swaps and revenue share agreements reflects a growing sophistication in how parties manage risk, optimise dispatch and structure long-term revenue. These developments are also enabling new buyer profiles to enter the market. Retailers are using virtual access agreements to firm portfolios, trading houses are pursuing arbitrage and FCAS access and commercial and industrial buyers are increasingly demanding 24/7 carbon-free energy products.
The evolution of BESS offtake agreements reflects a maturing market where legal structuring, commercial creativity and regulatory alignment are essential, particularly for contracts that span multiple value streams or involve novel financial instruments. For stakeholders seeking to navigate this dynamic landscape effectively, understanding these complex structures is no longer optional – it is essential.
As specialists in this area, we can provide advice across all aspects of BESS projects and offtake structures. Please contact our team for assistance with your specific requirements.
