27 min read
Learn how Power Purchase Agreements are accounted for under IFRS and their impact on companies. This article explores the benefits and challenges of PPAs and provides finance professionals and accountants with valuable insights to make informed decisions and deepen their understanding of these contracts.
For the wider market context, see our guide to corporate power purchase agreements; this article focuses on the IFRS accounting treatment.
Introduction to Power Purchase Agreements (PPAs) and IFRS
What are Power Purchase Agreements (PPAs)?
Power Purchase Agreements (PPAs) are long-term contracts between an electricity generator and a buyer, specifying the terms for the delivery and purchase of electricity. These agreements play a crucial role in the renewable energy sector as they promote investments in new facilities and secure long-term revenue for electricity generators.
Renewable share, PV and wind capacity for the markets these contracts are signed in are tracked and updated automatically in the Fiegenbaum Atlas dashboard.
PPAs (Power Purchase Agreements) offer companies a variety of benefits, particularly in the renewable energy sector. Here are some of the main benefits of PPAs for businesses:
Cost Stability and Predictability:
- Companies can enter into long-term contracts at fixed prices, helping them avoid energy price fluctuations and making energy costs more predictable.
Emissions and Environmental Responsibility:
- By entering into PPAs for renewable energy, companies can reduce their carbon emissions and meet their sustainability goals. This can also enhance brand image and foster customer loyalty.
Financial Benefits:
- PPAs can provide financial advantages as companies often gain access to renewable energy at more favourable rates compared to traditional energy sources.
- PPAs can also help reduce operational costs by avoiding investments in and maintenance of their own energy infrastructure.
Reputation and Competitiveness:
- Using renewable energy through PPAs can improve a company's reputation as an environmentally conscious and sustainable business. This can also help attract and retain talented employees who value sustainability.
Energy Independence and Security:
- PPAs enable companies to hedge against energy supply risks, especially in regions with uncertain or unreliable energy supply.
Promotion of Innovation:
- PPAs can support and promote innovative projects, such as the construction of new wind farms or solar plants, contributing to the advancement of renewable energy.
Overall, PPAs provide an effective means for companies to stabilise their energy costs, achieve their environmental goals, and differentiate themselves from competitors.
The contracts often have a term of 10-20 years and can have quite complex structures. This requires thorough analysis during the negotiation phase and the correct accounting of such contracts. In the current phase of the energy transition, the demand for green electricity exceeds supply. Therefore, companies with sufficient expertise and robust processes in the area of Power Purchase Agreements will have strategic competitive advantages.
Still, many renewable energy projects (e.g., hydro, hydrogen, cooling systems) have water usage implications. My water risk guide can help companies assess their energy-related water risks.
How PPA Accounting Varies Across Industries
The accounting treatment of PPAs under IFRS can differ significantly depending on the industry and business model. For example:
- Energy-intensive industries (e.g., chemicals, steel): PPAs are often classified as "own use," as contracts cover direct electricity consumption, reducing IFRS 9 implication.
- Financial institutions: Investments in virtual PPAs are frequently treated as derivatives under IFRS 9, leading to income volatility and disclosure obligations under IFRS 7.
- Tech and digital companies: Large-scale VPPA deals are part of ESG strategies, where fair value changes influence reported emissions reductions and investor disclosure.
These differences highlight why industry-specific expertise is critical when applying IFRS rules to PPAs.
IFRS & Corporate Reporting - Accounting for power purchase agreements (PPAs)
The Importance of IFRS in Accounting for PPAs
The International Financial Reporting Standards (IFRS) are accounting standards developed by the International Accounting Standards Board (IASB). Applying IFRS in accounting for PPAs is crucial to ensure a consistent and transparent representation of the financial impacts of these agreements. Compliance with IFRS standards is vital for companies entering into PPAs to improve financial reporting and provide reliable information to investors.
The practitioner reality behind those disclosures is uneven. Across 1,401 public 2024 and 2025 reports from European listed companies, 69 percent contain complete Scope 1, 2 and 3 data. Another 13 percent publish no extractable Scope data at all. And in 8 percent of the reports that do carry a Scope 3 figure, Scope 3 comes out smaller than Scope 1 or 2, which is a methodological red flag, because Scope 3 is typically five to ten times larger.
Advantages of Accounting for PPAs Under IFRS
Transparency and Comparability
Applying IFRS in accounting for PPAs allows companies to transparently present their financial performance and facilitates international comparisons with other companies in the industry. This helps build investor confidence and can lower the company's capital costs.
Risk Management and Fair Value Measurement
IFRS sets stringent requirements for risk management and the valuation of financial instruments. If a PPA - such as a green virtual PPA - includes a price-fixing component, it typically implies classification as a derivative, impacting the financial statements. The PPA is then treated as a financial instrument, similar to futures or options, with a fluctuating future value based on energy market developments. Derivatives or derivative components are to be accounted for as financial instruments under IFRS 9. Even if RECs are physically delivered and not separately priced, the entire contract is classified as a financial instrument.
Fair value measurement is more complex, as the value must be continuously assessed and determined. Most changes result from market price fluctuations, while other effects may arise from changes in assumptions and input parameters (such as expected volumes, shape, or quality factor). Generally, continuous fair value measurement of PPAs through profit and loss (FVTPL) leads to increased volatility in the income statement.
Hedge accounting is a tool used to address the differences in measurement and recognition between derivatives and the procurement of electricity/RECs. With hedge accounting, a company can reduce the impact of market fluctuations on the profit and loss statement of the hedging instrument (fair value of the PPA) and the hedged item (electricity demand or supply).
By applying these standards, companies can better manage their risks and accurately assess the fair value of their PPAs, leading to a more precise representation of their financial status. For further insights, you may refer to my detailed article on Life Cycle Assessment (LCA) and its importance in sustainability.
Expert Opinions and Controversies
There is ongoing debate among accounting experts on how far IFRS rules capture the economic reality of PPAs:
- Some auditors emphasize strict IFRS 9 classification, treating most PPAs as derivatives, which can create volatility in profit and loss.
- Others argue that “own use” exemptions should be applied more broadly, reflecting that many PPAs are fundamentally procurement contracts rather than speculative instruments.
- Market participants often stress the gap between rapidly evolving energy markets (e.g., corporate VPPAs) and the current IFRS framework, which was not originally designed for renewable energy contracts.
This controversy underlines the importance of interpreting IFRS not just through compliance, but also through strategic disclosure and risk communication.
Leasing and Own Use
Another crucial aspect of PPA accounting is that a physical PPA can be classified as a lease under IFRS 16 from the developer's perspective. This requires distinguishing between "Pay-as-Produced" contracts and volume or baseload-oriented contracts. If the contract transfers all generated benefits, including RECs, it could be considered a lease. An indication of a lease is also the transfer of control over the asset, such as the right to shut down. Lease accounting can increase complexity and imply recognition as a leased asset. To avoid this, especially with "Pay-as-Produced" contracts, it is essential to ensure that no control rights are transferred. Typically, power buyers choose the baseload model, where the contracted quantity or bandwidth of delivered power is predetermined.
Today, there is almost no physical equivalent for baseload products as nuclear power has been phased out and coal's role in the German energy mix is diminishing. The combination of solar, wind, and battery storage already allows power buyers to ensure continuous renewable energy supply, similar to traditional baseload profiles from fossil energy. Moreover, standardising PPAs simplifies the administrative process, as procuring remaining quantities now follows a standard profile through daily spot market trading, making the process less cumbersome.
Own use is the simplest case for industrial companies. A PPA that is not cash-settled still allows power to be sold on an active market in Germany and thus easily converted to cash. If the volume procured under the PPA does not exceed the company's electricity needs and the contract is concluded for own use, it falls outside the scope of IFRS 9. Embedded derivatives, such as price fixes or RECs, must be examined to determine if they should be accounted for separately or are closely related to the main contract. It is essential to note that a PPA with price fixation is most likely defined as a derivative.
Access to Capital Markets and Investors
Compliance with IFRS standards in accounting for PPAs can facilitate access to capital markets, as investors have confidence in the company's financial statements and can better assess the risks and opportunities of PPAs.
Challenges in Accounting for PPAs Under IFRS
Complexity of Contract Structure
The long-term nature of PPAs and the multitude of variables influencing their valuation make IFRS accounting a complex task. Companies must carefully analyse contract terms and apply complex valuation models to determine the value of fair value contracts.
Uncertainty of Future Energy Prices
In the future, it will be challenging to find baseload or pay-as-consumed contracts as the power plants that enable this become scarce. Therefore, sellers offering these contracts will have to bear the residual risk, leading to higher costs. On the other hand, flexible profiles will be comparatively cheaper due to the abundant wind and solar power and will additionally be "green" if you need guarantees of origin for your consumption. However, the residual risk arising when wind and solar do not produce enough power introduces uncertainties regarding electricity prices. Battery parks can mitigate this risk, either in combination with wind and solar or as standalone storage, absorbing power during cheap hours and delivering it when prices are high, reducing the remaining price risk or even allowing for profit from price fluctuations.
Impact on the Profit and Loss Statement
Accounting for PPAs under IFRS can impact the profit and loss statement, especially if the fair value valuation of PPAs changes over time. This can lead to volatility in financial results and complicate financial analysis.
Impact on Companies
Financial Reporting and Disclosure Requirements
Applying IFRS in accounting for PPAs significantly impacts financial reporting and disclosure requirements. Companies must provide detailed information about their PPAs and transparently present the effects on their financial position and performance.
Strategic Decision-Making and Company Performance
Accounting for PPAs under IFRS influences strategic decision-making as companies must consider the long-term impacts of these contracts on their performance. Accurate representation of the financial effects of PPAs enables companies to make informed decisions and improve their long-term performance. Explore how strategic decision-making is influenced by other financial tools like Marketing Mix Modeling.
Tax Implications and Compliance Requirements
Accounting for PPAs under IFRS may also have tax implications and compliance requirements. Companies must ensure they comply with tax regulations and properly account for the effects of PPAs on their tax returns.
Overall, accounting for Power Purchase Agreements under IFRS involves a range of benefits, challenges, and impacts on companies. Adherence to IFRS standards is crucial to ensuring an accurate and transparent representation of the financial effects of PPAs and supporting companies' long-term success.
Case Examples: How Companies Apply IFRS to PPAs
In a climate risk analysis we conducted for a southern German automotive dealership group with 18 sites, the quantified climate risk exposure reached up to 31.5 million euros per year, with roughly 88 percent attributable to physical risks (primarily hail and heavy rainfall). Five of the eighteen sites concentrated 35 percent of the physical risk. A PV carport investment served three purposes simultaneously: physical hail protection, charging infrastructure, and on-site electricity. Triple-use beats single-purpose.
Example 1: Tech Sector VPPA, A global cloud provider entered into a 15-year VPPA for wind power in Europe. Under IFRS 9, the VPPA was classified as a derivative, creating earnings volatility. The company adopted hedge accounting to reduce income statement noise, while using disclosures to highlight its net-zero pathway.
Example 2: Manufacturing Firm, A German industrial group signed a pay-as-produced PPA. As the contract matched internal energy needs, it qualified as “own use” and was outside IFRS 9. This simplified accounting treatment but still required transparency for CSRD reporting.
These contrasting examples show how regulatory classification interacts with business strategy and reporting obligations.
Checklist: Preparing for IFRS Accounting of PPAs
- Clarify whether the PPA falls under own use exemption or must be classified under IFRS 9.
- Assess if lease components exist under IFRS 16 when contracts transfer asset control.
- Develop models for fair value measurement and scenario testing under market price fluctuations.
- Establish hedge accounting documentation upfront to minimize volatility in reported earnings.
- Ensure robust disclosure processes under IFRS 7 to meet investor expectations and CSRD alignment.
- Engage with tax experts early, as derivative contracts may have unexpected tax consequences.
This checklist helps ensure companies approach PPAs not only from a compliance perspective but also as part of their financial and ESG strategy.
IFRS 9, IFRS 16 or executory contract: classifying your PPA
Classification is the decision that everything else follows from, and it is made once, at inception, contract by contract. IFRS 9 applies when the arrangement meets the definition of a derivative or carries embedded derivatives linked to variable electricity prices, in which case it is measured at fair value through profit or loss. IFRS 16 applies when the PPA conveys the right to control the use of an identified asset for a defined period, which puts a right-of-use asset and a lease liability on the balance sheet. Where neither test is met, the contract is executory and accounted for on an accruals basis as energy is delivered.
The tests run in sequence rather than in parallel. First, does the buyer control a specifically identified asset, for example exclusive dispatch rights over a named wind farm with contracted capacity matching actual output rather than a notional volume? If yes, the IFRS 16 lease definition is likely met, and long-dated take-or-pay clauses reinforce that conclusion because unconditional payment obligations signal an economic interest in the asset rather than a commodity purchase. If no, the question becomes whether the contract settles financially, which pushes it into IFRS 9.
| Contract feature | IFRS 9 derivative | IFRS 16 lease | Executory contract |
|---|---|---|---|
| Physical delivery | No, or net settled | Yes | Yes |
| Identified asset | Not required | Named facility, buyer directs use | No, or generic supply |
| Volume basis | Fixed notional volume, index linked | Contracted capacity matching actual output | Pay as produced, variable with generation |
| Net settlement possible | Yes, and any past practice of netting counts | Not the deciding test | No, delivery is taken and consumed |
| Dispatch rights | None, buyer has no say over generation | Buyer directs when and how much the asset generates | None, generator or grid decides |
| Own-use exemption | Unavailable for VPPAs | Not the deciding test | Available if IFRS 9.2.4 to 2.7 are met |
| Balance sheet effect | Fair value through P and L | Right-of-use asset plus lease liability | None, accrual as delivered |
| Typical case | Virtual PPA, CfD style | Sleeved PPA with exclusive dispatch rights | Standard physical supply, no dispatch rights |
Some contracts trigger analysis under both frameworks at once, typically where capacity reservation clauses coexist with price-indexed settlement terms. Document each test in writing at inception. Auditors increasingly challenge classification decisions that were not contemporaneously evidenced, and misclassification carries restatement risk that distorts the ratios lenders and investors look at.
Virtual PPAs (VPPAs) vs Physical PPAs: Accounting Treatment Differences
The accounting treatment for a PPA depends heavily on whether the arrangement is physical or virtual in nature. Under a physical PPA, the buyer takes actual delivery of electricity, and the contract is frequently assessed for an own-use exemption under IFRS 9. If the energy is consumed directly in the company's operations and the own-use criteria are satisfied, the contract is treated as an executory contract and kept off the balance sheet as a financial instrument, though lease accounting under IFRS 16 may still apply.
Virtual PPAs, or VPPAs, operate as purely financial contracts: the buyer and seller settle the difference between the contracted strike price and the prevailing market price, with the buyer separately procuring electricity on the open market. Because no physical delivery occurs, the own-use exemption is unavailable, and VPPAs are almost universally classified as derivatives under IFRS 9, measured at fair value through profit or loss unless designated in a qualifying hedge relationship.
Hedge accounting under IFRS 9 can significantly reduce the income statement volatility arising from VPPA fair value movements, provided the entity meets documentation and effectiveness requirements. Given the increasing adoption of VPPAs as a tool for corporate renewable energy procurement and Scope 2 emission reduction strategies, finance teams should proactively assess hedge eligibility at contract inception and maintain robust ongoing effectiveness testing throughout the contract term.
PPA Own-Use Exemption Under IFRS 9: How to Document and Defend It
Many corporate PPA buyers are entitled to apply the own-use exemption under IFRS 9 paragraphs 2.4 through 2.7, which removes physical commodity contracts from the scope of derivative accounting provided three conditions are met: the contract requires physical delivery, the electricity received is consumed in the normal course of the buyer's business, and the entity has no past practice of net settlement or of taking delivery and selling shortly after to generate a trading profit. When the exemption applies, mark-to-market volatility never reaches the balance sheet, which is a significant advantage for manufacturers, chemical producers, and data centre operators with predictable, large-scale consumption profiles.
Documentation must be established on day one of the contract, not retrospectively. A robust own-use file typically contains the board or treasury committee approval referencing the consumption rationale, a load-profile analysis confirming that contracted volumes align with actual site demand, and a written accounting policy affirming the exemption election. Auditors focus particularly on whether any volumes have been sold back to the grid or financially netted during the contract term, since a single instance of net settlement can taint the entire contract and force reclassification as a derivative under IFRS 9.2.6.
The exemption fails most often in two scenarios: when a company enters into back-to-back offsetting trades that effectively create net settlement, and when contracted capacity materially exceeds consumption, suggesting speculative intent. Energy buyers should therefore build a capacity buffer policy into their procurement governance, capping over-procurement at a defensible threshold, typically aligned with reasonable demand forecasting uncertainty, and documenting the rationale annually. Industries such as chemicals and data centres, which run high baseload consumption with limited demand variability, are generally well positioned to defend the exemption, provided their internal controls and accounting memos reflect that position clearly.
One point of the rule book changed with this reporting year. The IASB's amendments to IFRS 9 and IFRS 7 for contracts referencing nature-dependent electricity apply to annual reporting periods beginning on or after 1 January 2026, with earlier application permitted. They were written for exactly the contracts described above: wind and solar PPAs where the delivered volume is whatever the plant happens to generate in that hour. The amendments clarify how the own-use requirements are applied to such physically settled contracts, so that a structural mismatch between the generation profile and the consumption profile does not by itself defeat the exemption. They permit designating such a contract as a hedging instrument in a cash flow hedge with a variable nominal volume, which removes the practical blocker for buyers who could not define a fixed hedged volume. And they add disclosures in IFRS 7 on the effect these contracts have on financial performance and on the amount, timing and uncertainty of future cash flows. The consequence for the own-use file is simple: an assessment written before 2026 was written against different wording and should be read again, not just filed forward.
Which leads to the failure pattern that shows up most often in advisory work. Own-use is asserted once, at signing, and then never tested again. Volumes get resold into the grid in a weak demand year, a treasury desk nets two settlements because it is operationally convenient, a site closes and consumption drops below the contracted band, and nobody reopens the memo until the auditor does. Re-test at every reporting date, not at inception only, and keep the evidence in one place: contracted volume against metered consumption per period, a dated log of every sale back to the grid with its reason, and a note whenever the capacity buffer is exceeded. That file is what separates a routine audit question from a restatement.
Frequently Asked Questions (FAQ), Power Purchase Agreements (PPAs) and IFRS
What is a Power Purchase Agreement (PPA)?
A PPA is a long-term contract between an electricity generator and a buyer that governs the sale and purchase of electricity. PPAs are especially common in the renewable energy sector and support the development of new clean energy projects.
Why are PPAs beneficial for companies?
PPAs provide long-term price certainty, reduce exposure to energy market volatility, and help companies meet their climate goals by sourcing renewable electricity. They also contribute to reputational benefits and ESG performance.
How are PPAs accounted for under IFRS?
Accounting treatment depends on contract structure. Physical PPAs may fall under IFRS 16 as leases, while virtual or fixed-price contracts are often treated as derivatives under IFRS 9. A detailed contract assessment is essential.
What challenges arise when accounting for PPAs under IFRS?
Key challenges include evaluating complex contractual terms, estimating fair values amid market price volatility, and managing potential earnings fluctuations. These require robust modelling and disclosure practices.
What’s the difference between a physical and a virtual PPA?
A physical PPA involves the direct delivery of electricity to the buyer. A virtual PPA (VPPA) is a financial contract where the buyer and seller settle the difference between a fixed price and the market price, without physical delivery.
How do PPAs impact financial reporting under IFRS?
PPAs may introduce income statement volatility, especially when fair value changes are recognised in profit or loss. Companies must carefully assess how PPA-related assets and liabilities are presented in their financial statements.
What are the tax implications of PPAs?
PPAs can affect taxable income and require attention to the treatment of gains or losses on derivatives. Companies should ensure compliance with applicable tax laws and consider implications when structuring their PPAs.
Does a PPA go on the balance sheet under IFRS?
It depends entirely on classification. A virtual PPA classified as a derivative under IFRS 9 sits on the balance sheet at fair value, with movements running through profit or loss unless designated in a qualifying hedge. A PPA that meets the IFRS 16 lease definition puts a right-of-use asset and a matching lease liability on the balance sheet. A physical supply contract that qualifies for the own-use exemption and conveys no control over an identified asset stays off the balance sheet entirely and is expensed as energy is delivered. The commercial terms are often identical across all three; the accounting outcome is not.
Is a PPA an operating or a finance lease under IFRS 16?
The question does not arise for the buyer. IFRS 16 removed the operating and finance lease split on the lessee side, so a PPA that meets the lease definition is recognised as a right-of-use asset and a lease liability regardless of category. The distinction survives only for the generator as lessor. What does matter for the buyer is the lease term and the discount rate, because a twenty-year PPA discounted at the incremental borrowing rate can add a materially larger liability than finance teams expect when they first run the test.
How is a virtual PPA measured at fair value?
As the present value of the difference between the contracted strike price and the forward curve for the delivery point, across the remaining contract term, discounted at a rate that reflects credit risk on both sides. Two inputs drive the volatility: the forward power curve beyond liquid trading horizons, which is usually an extrapolation rather than an observable price, and the shape or profile adjustment for how generation is distributed across hours. Both are Level 3 inputs for the back end of a long-dated contract, so the valuation policy and the sensitivity disclosure matter as much as the number itself. Hedge accounting under IFRS 9 removes most of the P and L noise, provided documentation and effectiveness testing are in place from inception.
Are virtual PPAs always considered derivatives under IFRS?
Most virtual PPAs (VPPAs) are financial instruments because they involve cash settlement without physical delivery. This typically requires recognition under IFRS 9. However, each contract must be reviewed for embedded features such as price collars or floor mechanisms.
How does IFRS interact with sustainability reporting frameworks?
Increasingly, investors expect IFRS disclosures on PPAs to align with sustainability standards such as the CSRD, EU Taxonomy, and TCFD. This means companies should not only disclose financial implications but also link them with their carbon reduction strategies.
Which IFRS 9 or IFRS 7 changes apply to electricity contracts from 1 January 2026, and do they affect an existing own-use assessment?
The IASB amendments for contracts referencing nature-dependent electricity apply to annual reporting periods beginning on or after 1 January 2026, with earlier application permitted. They clarify how the own-use requirements work for physically settled wind and solar contracts, allow such a contract to be designated as a hedging instrument with a variable nominal volume, and add IFRS 7 disclosures on the effect of these contracts on performance and future cash flows. An existing own-use assessment does not fail automatically, but it was made against the previous wording, so the conclusion should be re-documented rather than carried forward untouched.
When does a PPA have to be re-tested for own-use after signing?
At every reporting date, and immediately whenever the facts move: electricity is sold back to the grid, settlements are netted, a consuming site closes, or contracted capacity drifts materially away from metered demand. IFRS 9 looks at what the entity actually does over the life of the contract, not at what it intended on day one, which is why a single unexplained net settlement can taint the exemption for the whole contract.
How is a PPA treated under US GAAP compared with IFRS 9 own-use?
US GAAP arrives at a comparable outcome by a different route. Under ASC 815, a physically delivered contract can be scoped out of derivative accounting through the normal purchase normal sale exception. Unlike the IFRS 9 own-use exemption, which follows from the facts, that scope exception is an explicit election and has to be documented when it is made. The detailed tests differ, in particular around net settlement and option-like volume flexibility, so a group reporting under both frameworks should not assume the IFRS conclusion carries across.
Further reading in the PPA cluster
- Corporate PPA accounting and financial strategy: the commercial and procurement side of the same contracts, including virtual PPA structures and pricing.
- PPAs and CSRD compliance: how the contract feeds Scope 2 market-based reporting and the ESRS E1 disclosures.
- Scope 2 reduction with EACs: how PPAs and energy attribute certificates work together in a net-zero strategy.
- Climate risk, insurance gaps and premiums: the physical-risk exposure sitting behind long-dated generation assets.
How I Can Help
As an independent sustainability consultant, I can assist your company in navigating the complexities of Power Purchase Agreements and their accounting under IFRS. With expertise in both sustainability and financial reporting, I offer tailored guidance to ensure accurate and transparent representation of PPAs in your financial statements. Whether it's conducting a thorough analysis of your contracts, implementing robust accounting processes, or providing strategic insights for long-term success, I am here to help.
Reach out today to discuss how we can work together to enhance your company's sustainability efforts and financial performance.
