In Europe, BESS development is shifting. The first wave was built on large standalone assets connected to the grid. With grid connections saturated, the next potential lies behind the meter (BtM) of consumption and generation sites, and increasingly in distributed fleets of batteries of a few hundred kW each.
These assets need to be financed like any other, and market risk cover remains a precondition for raising debt: in Germany, lenders require that 60% to 80% of revenue be contracted before committing project debt.
Physical FPAs (Flexibility Purchase Agreements) delivered that cover for the first wave, with close to 12 GW contracted in Europe in 2025. They were designed for utility-scale projects: each contract is negotiated for one asset and ties market risk cover to dispatch control, two features that are hard to apply to a distributed pipeline.
This paper examines how virtual and financial FPAs separate what physical FPAs bundle, why these tools are still too immature to let project finance scale, which avenues could get them there, and what this implies for players along the value chain. We structure the argument as follows:
▪ A – Physical FPAs suited Europe’s first wave of large standalone BESS, but they are written for one asset at a time and tie market risk cover to dispatch control, which makes small distributed assets costly to contract and dependent on the few firms able to do both
▪ B – Virtual FPAs detach risk cover from the individual asset, so small batteries can be pooled; financial FPAs also detach it from dispatch, so banks and funds can compete with traditional aggregators, leading to improved hedging terms
▪ C – Optimisers, offtakers and asset owners can now contract whole portfolios under framework agreements, so that adding a site no longer requires a new negotiation
▪ D – These tools cannot yet carry project finance at scale: few utilities buy virtual FPAs, and the EU index covers day-ahead arbitrage only, around a third of a French battery’s value
▪ E – Widening settlement to the full revenue stack is the way out: Great Britain already trades on such an index, and continental indices now exist to build on
▪ F – Financial players, behind-the-meter optimisers and distributed BESS developers would benefit, while incumbent aggregators would keep the front of the meter with thinner bundling margins
