This blog focuses on the potential reporting impact of procuring renewable energy through a corporate power purchase agreement.
The trend of large corporates focusing on their carbon footprint has further intensified over the last months. These companies are actively lowering their carbon footprint by rolling out energy efficiency programs as well as procuring from or owning renewable energy assets.
This is the second blog of a series of blogs aiming to provide you with clear insights into the varying motivations for companies for reducing carbon emissions as well as the different strategic options available to achieve this reduction. It offers a practical approach in achieving a competitive edge in the road to energy transition.
This blog focuses on the potential reporting impact of procuring renewable energy through a corporate power purchase agreement ('PPA').
The accounting treatment of a corporate PPA will vary depending on a number of elements and applicable accounting standards. The impact on the balance sheet of the corporate buyer could be significant under certain circumstances as in some cases total contracted (discounted) costs over the term of the contract will form the basis of a balance sheet liability which can impact gearing ratios, debt covenants and other KPI's. A number of key elements are driving the accounting impact. A simplified overview of elements for a physical PPA is included below.
Corporate buyers should clearly define what type of renewable energy solution they would like to procure their energy from and the preferred operational and pricing structure. Based on these characteristics, it is key to draft the corporate PPA and supporting documents carefully to mitigate the chance of having to report the corporate PPA on-balance.
Leading companies are taking an active role in the reduction of their carbon footprint for multiple reasons and through multiple options, often consisting of procuring renewable energy. In order to develop a new carbon strategy, an integrated approach should be taken, involving all the relevant corporate expertise and functions. One important element is the potential accounting impact of implementing a renewable energy solution. A careful assessment of the preferred operational and pricing structure in relation to the identified elements impacting the accounting treatment is recommended.
This blog is part of a series of blogs, each focusing on one or more of the corporate 'lenses' (such as finance, technology, markets, etc.), providing insights and practical lessons learned from experiences in the sector.