Flexibility Purchase Agreement (FPA): Definition, Mechanics, and Examples

In principle, any party with controllable flexibility can act as a supplier. In practice, however, there is a minimum size above which marketing makes economic sense — typically around 1 megawatt. A Flexibility Purchase Agreement also does not necessarily have to be physically backed: market participants without their own controllable asset can also act as suppliers and take on the associated financial risk, for instance by covering their position on the intraday market as needed. In this case, the creditworthiness of the supplying party becomes the key consideration: a supplier with a large, physically available flexibility portfolio is seen by the counterparty as more trustworthy than a supplier bearing the risk on a purely financial basis.

Pricing depends on the contractual structure and can be made as complex as desired. In its simplest form, a day-ahead schedule based on the respective highest- and lowest-priced hours — the so-called high-low spread — is agreed and delivered over a fixed period. The price for this flexibility is determined by market expectations over the entire contract term and, similar to a PPA, is fixed at the start of the contract.

A key driver of demand for Flexibility Purchase Agreements currently lies on the supply side of battery projects. While the investment and maintenance costs of battery storage can be calculated relatively reliably, future market developments over a period of five or ten years can barely be forecast. Infrastructure funds and financing banks are reluctant to bear this risk, which is why market partners are sought who will take it on at a fixed price. In this sense, a Flexibility Purchase Agreement can correspond to, or form part of, a Tolling Agreement. Unlike a full Tolling Agreement, in which the entire capacity and the entire market risk pass to a single offtaker, a Flexibility Purchase Agreement can also be concluded for only part of the storage capacity — say 20 or 40 percent — while the remaining share continues to be marketed via spot and balancing energy markets. This partial hedge reduces the risk to a level accepted by financing banks, while still leaving the operator additional earnings potential compared with a complete transfer of risk. Technically and operationally, the dispatch of the asset remains unaffected: a battery storage system is always deployed in whatever way generates the greatest economic benefit, regardless of existing delivery obligations — any differences from the contractually agreed delivery are balanced out on the market.

As a rule, the supplying party is obligated to deliver. If it fails to meet this obligation despite properly transmitted signals, a liability for damages arises — analogous to any other long-term power supply contract. Contracts can be structured so that no delivery obligation applies under certain conditions, but as a standard case, a firm obligation to deliver the agreed schedule applies.

The market for Flexibility Purchase Agreements differs structurally from the PPA market. While PPAs long played almost no role in Germany, because renewable generation was predominantly state-supported via the Renewable Energy Sources Act (EEG) and thus sold outside private-sector demand, this does not apply to battery storage: batteries are unsubsidized assets that finance themselves entirely through the market. This creates a distinct, privately driven demand for long-term hedging instruments such as the Flexibility Purchase Agreement. The market is still considered early-stage, though larger transactions and contract structures can already be observed. On the offtake side, the instrument is also gaining relevance, although market penetration is more complex: many large industrial offtakers still think in terms of classic peak and baseload categories — partly due to regulatory frameworks such as the baseload privilege (Bandlastprivileg) under Section 19(2) of the German Electricity Network Charges Ordinance, StromNEV. Cost-efficient power procurement, however, increasingly requires combining different building blocks from renewable generation, gas, and battery flexibility.