Power Purchase Agreements

Entities are increasingly entering into power purchase agreements (PPAs) for the procurement of renewable energy. PPAs are part of entities commitment to mitigate the effects of climate change and to decarbonise their production processes and products.  

In June 2023 the IFRS Interpretations Committee (Committee) discussed a request about applying the ‘own-use’ exception in paragraph 2.4 of IFRS 9 Financial Instruments to physical delivery contracts to purchase energy. IFRS 9 states that contracts that can be settled net and are held for an entity’s expected purchase, sale or usage requirements are accounted for as executory contracts and not as derivatives.

The Committee recommended the International Accounting Standards Board (IASB) consider undertaking a narrow-scope standard-setting project that focuses on how to apply those requirements to physical PPAs in which the underlying non-financial item:

• cannot be stored economically; and 
• is required to either be consumed or sold within a short time as determined by the market structure in which the item is bought and sold. 

In addition to the evidence gathered by the Committee, the IASB observed that application questions also arise for purchases of renewable energy through virtual PPAs (contracts for differences). Therefore, in July 2023 the IASB decided to add a project to the work plan to research whether it is feasible to make narrow-scope amendments to IFRS 9 to better reflect the effect of PPAs on the financial statements.