A power purchase agreement (PPA) is a long-term contract under which an entity (the Buyer) agrees to purchase energy (e.g., electricity or thermal energy) for a period of time from another entity that generates the energy (the Seller), usually as a method of fixing the Buyer’s price of energy.
As the market for these contracts evolves, the structure of and terms and conditions in these contracts continue to change, which can add complexity to the accounting.
This publication will focus on a PPA whereby the Buyer purchases power from a Seller that legally owns and installs an asset on the Buyer’s property for the life of the contract and produces energy for the use of the Buyer. The purpose of this publication is to outline the key decision points a Buyer must make in such a scenario in determining (1) whether the PPA is (or contains) a lease, and (2) the resulting measurement impact on its balance sheet and statement of operations. The specific terms of each PPA are critical in making these determinations, as well as a detailed understanding of the accounting requirements that is beyond the scope of this publication.
