Introduction to Power Purchase Agreements (PPAs) in the Context of Net Zero
To align with the Federal Council’s objective of achieving net-zero greenhouse gas emissions by 20502, Swiss companies are reevaluating their energy procurement strategies with the aim of reducing their carbon emissions and attaining carbon neutrality. Key concerns in this context include supply security, affordability, and the renewable nature of electricity sources. Power Purchase Agreements (PPAs) often represent an efficient and reliable option for energy procurement. However, the emergence of new products and technologies, along with the consequences of high energy prices, is creating uncertainties in the accounting treatment of these contracts.
PPAs are typically long-term electricity supply contracts3 between a seller and a buyer, whereby the electricity is sourced from renewable energy facilities. They allow buyers to secure “green” electricity over the long term, enabling price stability while supporting the expansion of renewable generation facilities. PPAs also offer buyers an opportunity to reduce their carbon emissions and implement their transition plans to net zero effectively. Typically, PPAs include “pay-as-produced” features, where the electricity producer’s volume risk is transferred to the electricity buyer. Rather than receiving a fixed nominal quantity, the buyer receives a share of the actual electricity generated (e. g., 40% of the out¬put from a solar farm).
Key Challenges:
Buyers have experienced challenges when applying the requirements of IFRS 9 Financial Instruments to physical delivery contracts4 for renewable energy purchases. This is due to:
- the characteristics of renewable electricity production sources and the design and operation of the market in which the electricity is sold;
- the fact that the “pay-as-produced” features require the purchaser to buy electricity generated from a reference production facility at the time it is produced. These features expose the purchaser to essentially all the risk that the volume of electricity produced may not match the purchaser’s demand at the time of production.
PPA-related risks and accounting can be complex. Depending on the structure of the contract(s), the impact on the financial statements may be substantial. In response to certain accounting challenges posed by IFRS 9, the International Accounting Standards Board (IASB) published amendments to IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures titled Contracts Referencing Nature-dependent Electricity on 18 December 2024.
The amendments aim to enable entities to include information in their financial statements that, according to the IASB, more faithfully represent contracts referencing nature-dependent electricity. This article explains the IASB amendments and highlights practical considerations for entities affected by these changes.
Scope of the IASB amendments
The amendments to IFRS 9 and IFRS 7 apply to contracts referencing nature-dependent electricity. These contracts are characterised by contractual features exposing an entity to variability in the underlying quantity of electricity, as the electricity is generated from sources dependent on uncontrollable natural conditions. This variability is typically associated with renewable energy sources, such as sun and wind power. For instance, solar electricity generation fluctuates according to uncontrollable natural factors like daylight availability and weather conditions such as cloud cover. Contracts referencing nature-dependent electricity encompass both contracts to purchase or sell nature-dependent electricity (i. e., physical delivery PPAs) and financial instruments that reference such electricity (i. e., virtual PPAs5).