Power Purchase Agreements

Timeline

The IASB issued an Exposure Draft: IASB/ED/2024/3 Contracts for Renewable Electricity Proposed amendments to IFRS 9 and IFRS 7 on 8 May 2024.

The Exposure Draft (ED) contains proposed amendments to:

• IFRS 9 Financial Instruments – in particular relating to the ‘own use’ requirements and hedge accounting in relation to specified contracts; and
• IFRS 7 Financial Instruments: Disclosures in relation to those contracts.

The ED is open for consultation for 90 days ending 7 August 2024.

The UKEB published its Draft Comment Letter on 5 June 2024 for public consultation. The consultation closes on 19 July 2024. Responses to questions in the Invitation to Comment are welcome.

The relevant documents are available at the end of this page:

• Draft Comment Letter
• Invitation to Comment and Your Details forms.

Background

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 Power Purchase Agreements (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’ exception in IFRS 9 and may therefore have to be accounted for as derivatives. In that case, currently hedge accounting cannot always be applied.

The IASB’s proposals follow a submission to the IFRS Interpretations Committee in June 2023. In the light of feedback to that submission, the IASB added a narrow scope standard setting project to its workplan in July 2023.

Key IASB proposals

The ED proposals include:

• Scope: the ED is restricted to contracts for renewable electricity where the source of electricity is nature dependent, and that expose the purchaser to substantially all the volume risk through ‘pay as produced’ features;
• ‘Own use’: clarification of factors an entity is required to consider when applying paragraph 2.4 of IFRS 9 to contracts within the scope;
• Hedge accounting: the use of a variable nominal amount of forecast electricity transactions as the hedged item in a designated cash flow hedge, using an instrument within the scope of the proposals as the hedging instrument; and
• Disclosures: additional disclosure requirements for contracts within the scope of the proposed amendments.

Next steps

The IASB has added a supplementary meeting to consider feedback to this ED in August 2024. The IASB has indicated it intends to issue final amendments in Q4 2024.

Planned outreach

The UKEB outreach includes discussions with stakeholders and public consultation on the UKEB’s Draft Comment Letter.

If you would like to contribute to outreach work on this project, please email ukendorsementboard@endorsement-board.uk.

For further updates on UKEB projects, you can subscribe to our newsletters and alerts by emailing contact@endorsement-board.uk and putting SUBSCRIBE in the subject.

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.

UKEB meetings

• April 2023 IASB General Update
• September 2023 IASB General Update
• December 2023 IASB General Update (under climate-related matters)
• January 2024 IASB General Update
• February 2024 IASB General Update (under climate-related matters)
• March 2024 IASB General Update
• April 2024 IASB General Update and see below for the Project Initiation Plan
• May 2024 Draft Comment Letter (see below for issued draft comment letter)