Power purchase agreements

Companies sign PPAs to lock in power costs and meet their renewable energy targets; developers need them to finance new wind and solar farms. The same commercial deal can be accounted for in three very different ways, with large effects on the balance sheet and on profit volatility. This guide walks through the lease test, the own-use exemption, virtual PPAs and hedge accounting, the 2026 amendments, and the generator's side of the contract.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 4 minute read.

Short answer

Power purchase agreements are long-term contracts to buy electricity, often from a specific wind or solar farm. Under IFRS, a buyer first asks whether the PPA contains a lease, which needs the right to direct the use of a specified plant, for example because it designed it. If not, a physical PPA settled by delivering power the buyer uses is an own-use contract, accounted for as purchases. A virtual PPA, settled in cash against the market price, is a derivative at fair value through profit or loss unless hedge accounting is applied. Amendments to IFRS 9 effective in 2026 ease both the own-use test and hedge accounting for wind and solar contracts. In this guide's example, a virtual PPA struck at $50 a megawatt-hour pays the buyer US$ 3 million in a year when market prices average $60.

At a glance

First question
Does it contain a lease?
Physical, not a lease
Own use if power is used
Virtual PPA
Derivative, fair value
Hedge accounting
Can reduce volatility
2026 amendments
Own use and hedging for renewables
Generator
IFRS 15 revenue or lessor
Power purchase agreementsFirst question: Does it contain a lease?; Physical, not a lease: Own use if power is used; Virtual PPA: Derivative, fair value; Hedge accounting: Can reduce volatility; 2026 amendments: Own use and hedging for renewables; Generator: IFRS 15 revenue or lessor.KEY FACTS AT A GLANCEPower purchase agreementsFirst questionDoes it contain a lease?Physical, not a leaseOwn use if power is usedVirtual PPADerivative, fair valueHedge accountingCan reduce volatility2026 amendmentsOwn use and hedging forrenewablesGeneratorIFRS 15 revenue or lessorTax BakersPower purchase agreementsFirst question: Does it contain a lease?; Physical, not a lease: Own use if power is used; Virtual PPA: Derivative, fair value; Hedge accounting: Can reduce volatility; 2026 amendments: Own use and hedging for renewables; Generator: IFRS 15 revenue or lessor.KEY FACTS AT A GLANCEPower purchase agreementsFirst questionDoes it contain a lease?Physical, not a leaseOwn use if power is usedVirtual PPADerivative, fair valueHedge accountingCan reduce volatility2026 amendmentsOwn use and hedging for renewablesGeneratorIFRS 15 revenue or lessorTax Bakers
Key facts at a glance, as set out in this guide.

Does the power purchase agreement contain a lease?

A PPA contains a lease if it relates to a specified plant, the buyer obtains substantially all of its output and the buyer has the right to direct how and for what purpose it is used. For wind and solar farms, operating decisions are largely predetermined by the weather, so the right to direct often rests on who designed the plant: IFRS 16 includes an example where a customer that designed a solar farm before it was built has a lease. A buyer that simply takes the output of a farm the developer designed and operates usually does not. If there is a lease, payments that vary with output are variable lease payments, excluded from the lease liability, so the liability may be small. See identifying a lease.

When is a physical PPA an own-use contract?

A contract to buy a non-financial item that can be settled net is within IFRS 9 unless it is held for the buyer's expected usage. Electricity cannot be stored easily, and a buyer of a wind farm's output will sometimes receive power when it does not need it, which is then sold into the market. Before 2026, those sales could call the own-use exemption into question. The amendments effective from 2026 say that, for contracts referencing nature-dependent electricity, such sales do not prevent own use if they arise from the mismatch between supply and demand and the buyer has been, and expects to remain, a net buyer of electricity over the contract period. An own-use PPA is accounted for as purchases when the power is delivered. See energy contracts and the own-use exemption and commodity hedging and own use.

Power purchase agreements: physical or virtual

A company agrees to buy 300,000 megawatt-hours a year from a wind farm at $50. Under a physical PPA, it receives the power and pays $50. Under a virtual PPA, it keeps buying power from its usual supplier at the market price, and settles the difference with the wind farm: it receives market price less $50 on the farm's output, or pays if the market price is below $50. In year 1 market prices average $60, and at the year end the fair value of the remaining virtual PPA, based on forward prices, is 8 million.

Physical and virtual PPAs comparedPhysical and virtual PPAs comparedTOPICPhysical PPAVirtual PPAPower deliveredYesNoSettlementPay for powerCash differenceUsual accountingOwn useDerivativeFair value in profitNoYes, unless hedgedCan contain a leaseYesNo
The same price lock can be accounted for very differently.
Year 1, US$ millionPhysical PPA, own useVirtual PPA, no hedge accountingVirtual PPA, cash flow hedge
Electricity cost15 at $5018 at market18 at market
Settlement receivedNone33, offsets the cost
Fair value gain on remaining contractNone8 in profit or loss8 in OCI, if effective
Net cost in profit or loss15715

The economics are similar: in each case the company pays about $50 a megawatt-hour. But without hedge accounting, the virtual PPA brings future price movements into this year's profit, here a gain of 8 million, and next year's loss if prices fall.

How does hedge accounting work for a virtual PPA?

The buyer can designate the virtual PPA as a cash flow hedge of its forecast electricity purchases. A difficulty was that the farm's output, and so the volume hedged, varies with the weather. The 2026 amendments allow a company to designate a variable volume of forecast electricity transactions as the hedged item, matching the volume the farm is expected to produce, so these hedges can now qualify more easily and be measured on a consistent basis. Effective changes go to other comprehensive income and are released as the hedged purchases affect profit. See IFRS 9 hedge accounting.

What about the certificates?

Most PPAs, physical and virtual, also transfer the renewable energy certificates generated by the farm, which is often the buyer's main reason for signing. The buyer needs a policy for the certificates it receives, and the generator must decide whether they are a separate performance obligation. See renewable energy certificates.

How does the generator account for the PPA?

If the PPA contains a lease, the generator is a lessor, usually under an operating lease, and recognises lease income. Otherwise a physical PPA is a contract with a customer under IFRS 15, with revenue as power is delivered, unless the generator's own-use position fails and it is a derivative. A virtual PPA is a derivative for the generator too, while it sells its actual power into the market. Developers that sell the farm after signing the PPA need to consider how the contract affects the farm's valuation. See power and utilities accounting.

What must be disclosed?

The 2026 amendments add disclosures under IFRS 7 for contracts referencing nature-dependent electricity that are treated as own use, including the contract features that expose the company to variable volumes, unrecognised commitments and the effects on the company's results. Companies applying hedge accounting disclose the usual hedge information.

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Questions people ask

Is a power purchase agreement a derivative?

A virtual PPA usually is. A physical PPA is an own-use contract if the buyer takes delivery for its own needs, unless it contains a lease.

When does a PPA contain a lease?

When it relates to a specified plant, the buyer takes substantially all the output and directs its use, often because the buyer designed the plant.

What did the 2026 IFRS 9 amendments change for PPAs?

They clarify the own-use test for nature-dependent electricity contracts and allow a variable hedged volume in cash flow hedges, with new disclosures.

How does a generator account for a physical PPA?

As revenue under IFRS 15 as power is delivered, unless the PPA contains a lease, in which case it is a lessor.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 9 Financial Instruments
  2. IFRS Foundation: IASB updates accounting standards for nature-dependent electricity contracts (December 2024)
  3. IFRS Foundation: IFRS 16 Leases

Rules and fees change. If you are reading this long after October 8, 2026, confirm the figures with the source before you rely on them.

Power and renewablesPower and utilities accounting: the key issuesManufacturingCommodity purchases, hedging and own usePower and renewablesRenewable energy certificates

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This guide is general information. It is not tax or legal advice for your situation.