Accounting Challenges related to wind energy mooring contracts The energy market is facing a new change: producers and large consumers are currently preparing for funding for the first wind farms to expire at the end of 2020 and price controls to come to an end. However, since even without government assistance, producers need revenue security to make the necessary investments in wind farms, other mechanisms will be needed in the future to allow energy sources to bring wind to market. Power purchase contracts (AAEs) – long-term direct purchase contracts with large customers – are a possible solution. Such agreements are currently considerably popular, although there are legal and accounting challenges with regard to their design, including for green electricity customers. First, the AAE must be reviewed to determine whether or not it meets all the characteristics of an embedded derivative. A controversial point in this context could be considered a criterion for contract performance on the basis of a “subliminal” value, since the final purchase volume is often only fully measured after actual production. Of course, it is not possible to accurately predict this volume for a wind farm, so an appropriate determination of the volume of the contract in the past has generally been considered unmet. However, IFRS 9 contains implementation guidelines (IFRS 9.IG. B.8), which now contain an example in which the amount of a derivative is not determined from the outset. In the case of an AAE, it is therefore possible to use the expected values, which are generally available for wind performance.
In the absence of significant acquisition payments, an AEA should be able to meet all the criteria for an IFRS 9 derivative. However, if it is a derivative, the green electricity customer may, in certain circumstances, avoid reporting changes in fair value by profit or loss through the application of hedging accounting. Indeed, even in the case of non-physical billing of the electricity supplied, it may be possible to link an AEA as a price hedging transaction to the risk of a volatile electricity supply in the future. On that date, the clean use exemption should be reviewed in accordance with IFRS 9. If the AAE service is physically billed and used for the customer`s business, it is an outstanding purchase agreement. In this case, this would not be recognized and would only be considered for possible dependent contracts, in accordance with IAS 37. Source: KPMG Corporate Treasury News, issue 85, October 2018 In this context, the accounting of PPAs is not an option, but a consequence of specific contractual provisions. PpA therefore offers industrial companies a good opportunity to source long-term and reliably with the green electricity requested. However, the impact on accounting and, indirectly, on risk information should be reviewed in a full timely manner.