The end of nuclear power in Germany has made it clear to many of us that renewables are now an integral part of modern power generation. But the varied nature of solar or wind electricity production can make buying green power an ongoing challenge.

Power purchase agreements (PPAs) are a vital part of the commercial chain for green power. These hefty contracts often include complex pricing formulas, long-term capacity profiles, bespoke payment terms, and other elements that require custom modelling. The challenge is capturing these details within an energy trading and risk management system (ETRM) that is optimised for low-complexity contracts and standardised trades.

Getting PPAs into classic ETRM is like putting a square peg into a round hole. What the industry needs is a platform that can:

• Capture and update contract details, from negotiation through completion
• Manage per-deal and portfolio analytics, valuation, and risk
• Track and analyse physical delivery, performance, and settlement

Negotiate, capture, amend

PPA negotiations and contracts cover a wide range of details. Capacity values, fixed or floor prices, wind turbine predictions (such as P90), and many other characteristics must be evaluated and agreed upon, often running more than 10 years into the future. And capturing the current trade is just the start. These numbers are often re-negotiated or re-evaluated after delivery begins, or new parameters added, requiring updates to the underlying pricing model.

The combination of bespoke contracts with a propensity for changes has pushed some market participants to use spreadsheets as their management tool. Spreadsheets may be ultra flexible, but they do not have the best capabilities for governance, and auditability as things change. And their user-interface capabilities do not provide very controlled deal-entry screens for commercial staff.

Energy traders need a customisable deal capture system within a controlled environment for creating and amending contracts, deploying user-friendly deal entry and evaluation applications, and capturing the full audit trail of changes. This must also include the ability to time-travel throughout the life of the trade. If and when the trade is renegotiated with different parameters or a different valuation model, reports can be run as of any date in the past to perfectly reproduce the previous state and values, satisfying the needs of internal governance and external regulations or audits. 

Analyse and manage risk

Complex power contracts often require custom analytics and scenarios to properly model and manage the risks. An effective PPA solution should be consistent and apply the same analytics throughout the lifecycle of a contract, from “what-if” pre-trade scenarios through the delivery phases to contract extension or termination. This means giving commercial originators and traders the opportunity to create candidate trades and explore scenarios with the same data and models as risk managers use. And when modelling tweaks or new structures are deployed, using enterprise-scale version control and deployment tools to keep everyone in sync, from individual contracts to overall books and portfolios.

PPA management requires the ability to represent the variability of future power generation. For valuations, a granular power forward curve that fits the prices on the screen, with the capability to flex both the market inputs and modelled ones like intraday shape, is only the start. The best solutions allow clients to input their own scenarios and model the complex interplay between spot prices and power produced. And when running analytics reports, the system should provide options to use simple pricers or proprietary analytics, distributed over multiple cloud nodes if faster intraday runs or portfolio-wide risk assessments are needed.

Non-standard contracts deserve some non-standard risk metrics that go beyond regular sensitivity calculations. In particular, long term positions, especially with a sting in the tail like a floor price, benefit from ladder reports which present macro moves, distributional analysis, and specific scenario valuations. Including hedges alongside PPA contracts helps show the benefit of netting off individual risk or aggregating risk broadly across the business.

Track physical performance

Finally, PPA systems need to be able to track and capture actual delivery against forecasts, and also potentially revise actuals if they are restated, without losing the original values. This requires what Beacon calls bi-temporal time series. Using this technique, database entries have two timestamps: the date and time associated with the original data, and the date and time it was entered or changed, preserving both the original and updated values.

Since previous values are never overwritten, this technique provides the ability to view things as they were at any given point in time. With data revisions fully integrated into financial models and reports, traders and risk managers can simply adjust the desired time of a PnL or risk report to quickly compare estimated versus actual values in monthly reports or examine impacts of revised energy delivery. Risk and regulatory reports can be run “as of” any date to consistently reproduce earlier analyses.

From another perspective, sometimes it is necessary to manage for the very short term and have performance and risk reports that can change focus accordingly. Delta reports that span all timescales are essential, but so is an hourly position report for the very near term. This latter can be a vital tool for tracking imbalances during the day.

Conclusion

There may never be a perfect, out-of-the-box, solution for managing PPAs. Classic ETRM systems have not been built with PPAs in mind. But using fragile spreadsheets and other informal systems just doesn’t scale to handle the breadth and depth required. 

Beacon’s extensible platform has been designed from the ground up to support complex and bespoke trades alongside standard hedges. The foundations include many common use cases and reports such as value-at-risk (VaR) and PnL Explain, out of the box. But Beacon is also a development platform at heart, enabling clients to extend and enhance it as their needs evolve. The result is the extensibility and analytical building blocks to cope with the most demanding of PPAs, plus the transparency, auditability, and controls required for today’s demanding energy producers and customers. We can’t change the square peg nature of PPAs, but we can partner with clients to customise and deliver our ETRM that is more flexible and adaptable to different types of PPAs.