Flexible Connection Agreements (FCAs) are aiming to enable the rollout of German BESS in a way that ensures grid stability can be maintained. This article looks at the impact of these on the financing of BESS assets and the complexity they can add.

Across various markets, grid constraints are leading to connection delays as grid operators look to manage large queues of renewable and energy storage assets which are looking to connect to systems that in most cases were not built to manage increasingly intermittent generation, as well as a growing mismatch between supply and demand, both temporally and geographically. While physical grid infrastructure is being upgraded on a large scale, this is clearly a longer term solution and with ambitious targets around renewables and increasing demand for electricity there is a need for shorter term solutions as well.

In the UK, NESO’s connection reform aims to re-order the connections delivery pipeline to prioritise the most well-developed projects and those in more favourable locations. This aims to provide more certainty on connection dates although has led to many projects facing significant delays. There are also increasingly non-firm connection offers given to manage these queues, and a similar approach is being rolled out on some scale in Germany.

Flexible Connection Agreements (FCAs) are bilateral agreements between the asset owner and the Transmission/Distribution System Operator (TSO/DSO). They allow the owner to connect to the grid significantly faster than would otherwise be the case in return for accepting certain constraints. They may also reduce grid fees such as the Baukostenzuschuss (BKZ) which is often a material component of the capex for German BESS projects.

Why accept an FCA?

Another key reason that many BESS assets are signing up for FCAs is the risk of further regulatory change, particularly in the shorter term. There is a current 20 year exemption to grid fees for BESS assets commissioned prior to August 2029 which the German Federal Network Agency (BNetzA) has confirmed will not remain in place indefinitely – the final framework for these grid fees is due around the end of 2026 and only assets with FID taken prior to this being published will benefit from the ‘grandfathering’ protections from capacity fees, which are the known component that were announced by BNetzA on 27 May 2026. However, dynamic grid fees are still coming and are excluded from this ‘grandfathering’ .

As well as the financial impact of not utilising a valuable assets, there is also the risk of a materially worse project at the point of connection as these grid fees may impact returns more than an FCA would (although the results will be highly asset specific and dependent on duration, location etc). Of course, assets connecting post August 2029 may also be forced to connect under FCAs as well as paying the grid fees – physical upgrades to grid infrastructure will take time and every suggestion is that FCAs are here to stay.

From the perspective of the TSO/DSO, the constraints imposed under these FCAs are able to help them to manage battery dispatch and ensure that the grid remains able to operate. Importantly, they are not standardised, so the impact can vary significantly from project to project. Some common constraints imposed under FCAs include (but are certainly not limited to):

• Curtailment – limits ability to charge and discharge into the grid during certain times.
• Ramp rates – limits ability to change the power input/output
• Ancillary services – limits participation in these markets (e.g. a Frequency Restoration Reserve (FRR)).

Some of these constraints may also only apply to parts of the assets capacity and so may be imbalanced between the import/export legs.

These can have significant impacts on asset revenue (your preferred market advisor/revenue curve provider would likely be capable of modelling these), but they also add complexity to various other key parts of the financing process.

Managing additional complexity

Many lenders are uncomfortable with high levels of merchant risk in BESS and the presence of fixed revenues improves the terms that can be achieved. Assets that are configured to benefit from synthetic inertia contracts can achieve small amounts of fixed revenue from these, but for the majority of lenders, more fixed revenue is preferred if not required.

Well established route to market solutions such as tolls and floors have always seen some price variation across assets but these differences will grow and grow as more assets are looking to sign up to FCAs which will reduce the prices that can be achieved. Day ahead swaps/other similar products won’t necessarily see such price variations but will require more thought at the structuring stage as to how the ‘floating’ legs paid out to swap counterparties relate to the actual revenues that can be earned by BESS in an environment where these revenues are being impacted by FCAs. Off-the-shelf solutions won’t work in the same way across different assets.

Our approach

An experienced financial advisor can assist with analysing these different structures, compare equity returns, and providing analysis of various terms received from lenders, but we aim to go further at Elgar Middleton. We are involved across all aspects of the transactions we work on and so take a proactive approach to structuring them. Our technical understanding allows us to look at each project/client individually and structure around constraints (whether FCA imposed or otherwise!), achieving the most attractive terms possible with our comprehensive approach to term sheet negotiations.

Elgar Middleton has closed almost 2GWh of BESS, both RtB sales and numerous debt transactions using a whole range of RtM strategies and understands the unique idiosyncrasies of each. Our experience in the UK market as well as more recently in Germany makes us very well placed to navigate the issues discussed in this article.

If you are planning a financing or considering a sale in the renewables sector and want an advisor who will not only secure capital but also manage the complexity of the process, we would be delighted to speak with you.