Power Purchase Agreements


In December 2023 the IASB decided to publish an Exposure Draft (ED) containing proposed amendments to IFRS 9 Financial Instruments to permit entities entering power purchase agreements (PPAs) to account for them under the IFRS 9 ‘own use’ exception. It is expected to be published in May 2024.


Streamlined Energy Carbon Reporting requirements (SECR), Taskforce on Climate-Related Financial Disclosures (TCFD) and associated Companies Act requirements require UK entities to disclose their greenhouse gas emissions and progress towards net zero commitments. It appears that, increasingly, entities are entering into PPAs to secure both price and a supply of renewable electricity, validated by third-party renewable energy certificates (RECs). However, there are accounting challenges as PPAs do not always currently meet the ‘own use’ exemption and may therefore have to be accounted for as derivatives. In that case, currently hedge accounting cannot always be applied.

In relation to the ‘own use’ requirements, the IASB tentatively decided to limit the scope of the amendments to those contracts for renewable electricity for which the source of production is nature-dependant, with the effect that the time or volume of supply cannot be guaranteed, and where the purchaser is exposed to substantially all the volume risk under the contract through pay-as-produced features. Examples provided include wind, solar and hydroelectricity.

The IASB also tentatively decided that, from the contract’s inception and throughout its duration, the purchaser under the contract should be required to consider the purpose, design and structure of the contract, and whether the volume expected to be delivered under the contract continues to be consistent with the entity’s expected purchase or usage requirements.

In relation to the IFRS 9 hedge accounting requirements, the IASB tentatively decided that if certain criteria are met, an entity is permitted to designate a variable nominal volume or quantity of forecast sales or purchases of renewable electricity as the hedged item in a cash flow hedge. The hedging proposals are expected to affect only IFRS 9, and will not change IAS 39.

The IASB has also tentatively decided to require disclosure of the terms and conditions of relevant contracts, on the net volumes purchased or net settled, and either the fair value of contracts or the volume expected to be sold or purchased over the remainder of the contract.

The UKEB has monitored the development of the IASB project. Updates for the UKEB have been included in the IASB General Update papers, detailed below.

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Document type
30 April 2024