How to structure cross-border tolling agreements for power

Cross-border tolling agreements let you separate the ownership of a power asset from the commercial risk of operating it. But when the asset sits in one jurisdiction and the off-taker in another, the structure gets more complex. You need to manage not just the usual tolling risks—fuel supply, plant performance, market prices—but also the legal and regulatory gaps between countries. This article walks through the key decisions and clauses that make cross-border tolling work.

What a tolling agreement actually does

A tolling agreement is a contract where the owner of a power plant (the toller) grants a third party (the tolling party) the right to use the plant's capacity. The tolling party supplies the fuel—often natural gas—and pays a fixed fee for the right to convert that fuel into electricity. The toller operates and maintains the plant, while the tolling party takes on the commodity price risk and sells the output. This model transfers commodity price exposure to the tolling party while securing predictable revenue streams for the infrastructure owner, as noted in LexisNexis guidance on tolling agreements in the LNG sector.

In a cross-border context, the same logic applies, but the tolling party may be in a different country from the plant. That introduces currency risk, export/import permits, and the question of which country's grid rules apply to the delivered power.

Key structural choices

Before drafting, you need to make three high-level decisions:

1. Which entity holds the plant? The toller should be the legal owner of the asset, but in cross-border deals, ownership may be held through a local subsidiary to satisfy foreign investment rules. This affects tax and liability.

2. Who bears fuel supply risk? In a classic toll, the tolling party supplies the fuel. But if the fuel must cross a border, you need to specify who is responsible for import permits, transport, and quality. The TotalEnergies explainer on tolling confirms that the tolling party typically owns the raw material and asks the plant owner to process it.

3. How is the toll calculated? The fixed fee should cover the toller's fixed costs and a return on capital. But in cross-border deals, you must also account for currency fluctuations. If the toll is paid in one currency and the plant's operating costs are in another, you need a clear mechanism for adjustment.

Regulatory and legal risks to address

Cross-border transactions carry compliance risks, tax challenges, and more, as Global Link Law notes. For tolling agreements, the specific risks include:

• Export/import restrictions: Electricity and fuel may be subject to export controls or tariffs. You need to know which permits are required and who obtains them.
• Grid access and transmission: The plant may be connected to a grid that is not fully integrated with the off-taker's market. Cross-border trading arrangements, such as power pools, can help, but they are not universal. The World Bank's work on cross-border power trading highlights that power pools can generate sustained increases in cross-border trading, but only where regional arrangements exist.
• Choice of law and dispute resolution: Which country's law governs the contract? What happens if the parties disagree? Well-drafted agreements should address choice-of-law issues, dispute resolution, indemnification, and insurance obligations, as Lewis Brisbois advises for cross-border transportation agreements. The same principle applies to tolling.
• Tax withholding: Payments for tolling services may be subject to withholding tax in the plant's jurisdiction. You need to structure the payment flow to minimize leakage, ideally through a tax treaty.

Practical drafting checklist

Use this checklist when reviewing or drafting a cross-border tolling agreement:

• Define the service clearly: Specify that the toller provides conversion of fuel into electricity, not the fuel itself.
• Allocate fuel risk: State who owns the fuel at the plant gate, who bears the cost of transport, and who is responsible for quality.
• Set the toll formula: Include a fixed capacity charge and a variable charge that adjusts for currency and inflation.
• Address force majeure: Cross-border events—border closures, export bans, grid failures—should be explicitly listed as force majeure events.
• Choose the governing law: Pick a neutral jurisdiction or the law of the country where the plant is located, but be consistent.
• Include a dispute resolution clause: Prefer arbitration under a recognized set of rules to avoid litigating in multiple courts.
• Plan for termination: What happens if the tolling party defaults? Who owns the fuel on site? How is the plant returned to the toller?

The role of cross-border market integration

Cross-border tolling works best where power systems are already integrated. The IEA notes that power systems have run up against jurisdictional boundaries since their earliest days, and integration is a gradual process. In Europe, for example, cross-border tolling structures are limited to a handful of interconnected markets, but they represent a medium-term opportunity as international integration deepens, according to Dataintelo's market report. If you're structuring a deal in a region without established cross-border trading rules, you'll need to build more flexibility into the contract to accommodate regulatory changes.

Quiz: Test your understanding

Which party typically bears the commodity price risk in a tolling agreement?

• The toller (plant owner)
• The tolling party (off-taker)
• The grid operator

Correct answer: The tolling party (off-taker). The tolling party supplies the fuel and takes on the commodity price exposure, while the toller receives a fixed fee for the plant's capacity.

How the Featured Expert Can Help

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