tolling agreement

A contract where one party provides fuel to a power plant and receives the generated electricity in exchange for a fee.

A tolling agreement is a specialized contract between a power generator and a buyer (often an energy trader, utility, or industrial user) where the buyer acts as the "toller." Under this arrangement, the buyer delivers raw fuel, such as natural gas, directly to the generator's power plant. The generator then processes this fuel to produce electricity, which is delivered back to the buyer in exchange for a pre-agreed processing or capacity fee. For investors, tolling agreements are highly valued because they fundamentally alter the risk profile of a power generation asset. By separating the ownership of the fuel and the final electricity from the physical operation of the plant, the generator is insulated from commodity price volatility. This effectively converts a highly volatile merchant power business into a stable, predictable, infrastructure-like cash flow stream. When analyzing companies with tolling agreements, investors should look at the creditworthiness of the counterparty, as the generator is highly dependent on the toller's ability to pay. A key risk is operational performance: if the plant experiences unscheduled outages or fails to meet agreed-upon efficiency targets (heat rates), the generator may face steep financial penalties, disrupting the expected stable cash flows.

An independent power producer owns a 500-megawatt natural gas plant and enters a tolling agreement. The counterparty agrees to pay a fixed capacity charge of $10,000 per day to keep the plant available, plus a variable operating fee of $2.00 per megawatt-hour (MWh) generated. If the plant runs at capacity for 24 hours, generating 12,000 MWh, the total revenue for that day is calculated as: $10,000 + (12,000 MWh $2.00) = $34,000, with the counterparty absorbing all fuel costs.