In many utilities, it is hard to point to the moment someone decided how the PPA portfolio should be managed and operated. Decisions to invest in renewables and to grow a PPA business were usually taken at board level, driven by climate commitments, investor expectations, customer demand and EU targets. Power Purchase Agreements followed, some simple, some complex. How these contracts should be valued, hedged, balanced, settled and invoiced over their lifetime was often only worked out once they reached the trading unit, including its operations and back office.
We have looked at the symptoms in earlier articles: valuation models that miss the settlement logic in complex PPAs, trading system landscapes built for standard products, and operating models that are not fit for purpose. Based on our work with utilities across Europe, we see a common denominator. In most cases, there was no clear strategy and operating model for how the PPA portfolio should be managed and operated, from signing to final settlement, and in some this still does not exist.
How the PPA portfolio was built
PPAs became a main route to market for wind and solar assets when subsidy schemes were scaled back and corporate demand for renewable power grew. EU policy added to the pressure. The 2023 revision of the Renewable Energy Directive raised the binding 2030 target to at least 42.5% of gross final energy consumption, compared with a renewable share of around 23% in 2022.
Utilities responded through investment and commercial growth. Capital plans were approved, pipelines were built, and PPAs were signed, both with independent producers and with corporate off-takers, and with a multitude of structures. Many of these decisions were deliberate and well made.
What happens after the contract was signed did not receive necessary attention. A PPA has to be managed every day for the rest of its life, and in most utilities that work falls to trading, operations and back office. The operating model supporting the management of these contracts was rarely designed in advance. Instead, these functions often had to work it out when the contract reached their desk: which processes to follow, how to handle customer questions to invoices, how to respond to new customer requests, and who decides when something falls outside the standard flow.
What PPAs bring with them
Trading units are, to a large extent, set up for standard wholesale products: baseload, peak and off-peak blocks with fixed delivery periods, liquid forward curves and standardized settlement. A PPA may look like a power position, but it behaves very differently. Utilities also sign PPAs on both sides, buying from producers and selling to corporate customers, and the risks they carry shift depending on which side they are on.
Earlier PPAs: long tenors, often pay-as-produced.
Many of the first PPAs were long-term pay-as-produced contracts, and many of them are still in the books today. Under these contracts, the off-taker takes the asset’s actual production. Volume then follows the weather, which adds volume risk to price risk, and the two are linked, because prices tend to be lower when it is windy or sunny.
The value of this type of PPAs therefore depends less on the baseload price than on the prices in the hours when the asset actually produces, often called the capture price. As more wind and solar come online, prices in those hours tend to fall and negative prices become more frequent. How a PPA treats negative-price hours can have a significant effect on its value.
Deviations from the production forecast also create imbalance costs, which most European markets now settle in 15-minute intervals. Someone has to forecast, nominate and absorb these deviations, and operations and back office have to settle and reconcile them. With tenors of 10 years or more, much of the contract value also sits beyond the liquid part of the forward curve and depends on modeled prices.
Recent PPAs: shorter and more flexible.
More recently, the market has been moving toward shorter tenors and more flexibility in both price and volume. Baseload and shaped profiles, floors, caps and collars, hybrid and storage components, and indexation are becoming more common, and are often combined in a single contract. Shorter tenors reduce some risks but can make wind and solar parks harder to finance, as lenders generally favor long-term, stable revenues. Each new feature also adds to what has to be valued, scheduled, settled and controlled, on top of the Guarantees of Origin and counterparty credit exposure that every PPA carries.
Taken together, many utilities now run a mixed portfolio of older and newer structures side by side. That is a different business from the one most trading units were designed for, and few companies formally decided how it should be run. Many have since found practical solutions through trial and error, but those solutions often depend on manual processes and interventions that may erode margins and make it more difficult to scale.
Each of these workarounds usually makes sense on its own. What is missing is a shared view of how they fit together, an operating model managing PPAs.
What a missing strategy can look like in practice?
A missing strategy rarely shows up as one clear failure. More often, it appears as recurring friction that people have learned to live with. Not every utility show all of the signs below, but in our work we often see several of them together.
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Ask the functions involved who owns the full result of a PPA, from signing to final settlement, and the answers may differ.
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The internal price at which a PPA is handed over for day-to-day management is often agreed deal by deal rather than through a consistent method. The economics of a deal and the risk of managing it can then end up in different places.
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The price agreed at signing rests on one set of assumptions and models. Once the PPA is in the book, it may be revalued with a different, simpler model, while settlement and invoicing follow yet another logic. Explaining the P&L, and especially how it develops over time, then becomes a reconciliation exercise.
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Mandates and limits are often designed for price exposure in standard products. Volume, profile, cannibalization and balancing risk, as well as long-dated credit exposure, may be measured differently across functions, or not consistently at all.
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The instruments exist: standard baseload and peak products, shaped and profiled forwards, structured OTC solutions, options and weather-linked products. The harder question is what the company wants to hedge, to what extent and at what cost. Without a policy, those choices tend to be made trade by trade, and residual risk can stay in the book without anyone actively managing it.
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Scheduling, Guarantees of Origin handling, settlement, invoicing and customer queries for complex PPAs are often processed partly outside the core systems, because these systems were set up for standard products. Each new contract structure tends to add another workaround.
None of the issues above are easily solved by one function alone. Each traces back to decisions that should have been subject to a rigorous New Product Approval Process (NPAP) and signed off by a New Product Approval Committee (NPAC) before a new PPA structure was signed.
Why the problems keep coming back
This helps explain why the issues covered earlier in this series are so persistent. An ETRM system is challenging to configure for a PPA strategy that hasn’t been defined. A valuation model is difficult to sign off when it’s unclear whose P&L it measures. And an operating model is hard to implement when roles and responsibilities across the trading unit, and sometimes beyond, have not been agreed.
Utilities often address these problems one by one: a new system module, a new model, a reorganization. Each step can help, but without an end-to-end view, the underlying strategy and decisions, the friction often just moves somewhere else, for example from trading into operations or back office.
What a PPA strategy should answer
A PPA strategy and operating model do not need to be extensive. They need to answer a handful of questions clearly enough so that processes, systems, models and organization can be built around the answers.
Start with what the portfolio is for:
Hedging own generation,
Supplying customers,
Offering route-to-market services to producers, or
Trading in its own right.
Most utilities do several of these, and each purpose implies a different risk appetite and a different measure of success.
The company has to decide which risks to keep, and which contract structures it is prepared to sign given its ability to value, operate and settle. Price, volume, profile, balancing and credit risk are all present, but only some are core to the business model. The others can be passed on, hedged or priced in.
Each retained risk, and the result, needs clear ownership for the full lifetime of the contract. This ownership only holds if value is measured consistently from pricing to settlement, with a transfer-pricing method everyone accepts.
The strategy and operating model should also define the capabilities required across trading, risk management, operations and back office: forecasting, structuring, processes, systems, data and people. These should be tailored to the portfolio the company intends to have, rather than the one it happened to accumulate.
In practice, the NPAP is where the operating model is applied deal by deal. No new type of PPA should be signed before all critical functions, including trading, risk management, operations and back office, have confirmed that it can be valued, hedged, operated and settled. That approval is formally given in the NPAC, where all of these functions are represented.
The answers will differ from utility to utility. A practical first test is whether trading, risk management, operations, and back office would give the same answers today to two simple questions: what is the purpose of the PPA portfolio, and who owns the results?
In the next article, we look at organizational silos and the operating model gap. If these patterns sound familiar, we are happy to talk through where your PPA strategy stands.