Power Purchase Agreements in a Gross Pool Electricity Market (IFRS 16)

Date recorded:


The Committee received a request about an electricity retailer’s (customer) accounting for a power purchase agreement (PPA) in a gross pool electricity market. In the fact pattern described, the PPA swaps the spot price per megawatt of electricity the windfarm will supply to the grid—for the 20-year term of contract—for a fixed price per megawatt, and is settled net by the customer and transfers to the customer all renewable energy credits that accrue from use of the windfarm. The request asked whether, applying IFRS 16:B9(a), the customer has the right to obtain substantially all the economic benefits from the use of the windfarm throughout the 20-year term of the PPA.

Staff analysis

The staff did not perform an outreach on this submission because they knew from work undertaken in the development of IFRS 16 that PPAs are common contracts in the utility industry and such contracts are typically material for entities that enter into them. Moreover, they were of the view that the question about “economic benefits from use” of an asset is a broader question that should be addressed by analysing the submission.

One of the reasons for getting to the view that the customer has the right to obtain substantially all the economic benefits from the use of the windfarm is by combining the PPA with the expected purchases of electricity via consumption from the grid and treat them as a single contract for consideration. The customer expects to purchase at least the amount of electricity the windfarm supplies to the grid at a fixed price per megawatt which exposes the customer to price risk. Also, IFRS 16:B21 describes economic benefits from use broadly and does not require physical delivery of the output of that asset. In the fact pattern described, the market prevents participants from contracting for the purchase of electricity directly. However, the economic substance of the transaction in such a gross pool electricity market is actually the same as those in a net pool electricity market and the accounting treatment should be the same. With the above arguments, the answer to the question asked is “yes”.

The staff disagreed with the above view because the PPA provides the customer with neither the right to obtain electricity from the windfarm nor the obligation to purchase any particular amount of electricity either from the windfarm of the grid. If the customer unexpectedly requires a low volume of electricity in any period, it adjusts its consumption and purchases only the volume needed. It is different from a customer in a net pool electricity market who has contracted with a supplier to purchase a specified volume of electricity and has both the right to the volume of electricity and a contractual obligation to purchase it. Moreover, the staff considered that the price risk exposure for all the electricity produced by the windfarm is not an economic benefit from use of it because the PPA does not create a contractual obligation for the customer to purchase. Therefore, it does not have ability to obtain all the economic benefits from the eventual sale of the electricity. Lastly, the staff found no basis to combine the PPA and the customer’s expected purchases of electricity from the grid because it does not meet the criteria for combining contracts in IFRS 16:B2.

Staff recommendation

Based on the above analysis, the staff concluded that the principles and requirements in IFRS Standards provide an adequate basis to determine whether the customer has the right to obtain substantially all the economic benefits from the use of the windfarm in the fact pattern described. The staff recommended not to add the matter to the Committee's standard-setting agenda but to publish a tentative agenda decision.


Committee members generally agreed with the staff analysis and conclusion but they suggested some improvements to the drafting in the agenda decision.

One Committee member commented that the agenda decision should clarify if the customer needs to consolidate the supplier and also provide analysis on whether the customer has control over the asset before making the current analysis of whether the customer has the right to obtain substantially all the economic benefits from the use of the windfarm. Moreover, the assessment on the derivative arising from the contract should also be provided. The staff replied that the agenda decision did not intend to answer all potential questions arising from the fact pattern but admitted that the agenda decision is not clear enough in answering the specific question (i.e. application of IFRS 16:B9(a)) asked by the submitter. The staff would amend the agenda decision to make that clear.

Another Committee member said that the agenda decision should emphasise that the two contracts in the fact pattern could not be combined and suggested adding the combination criteria in IFRS 16:B2 for a clearer explanation. However, the staff finally decided not to add such a reference as it adds extra complexity only to address multiple contracts.

Some Committee members said specifying "gross" vs. "net" pool electricity markets seems to imply they would automatically fail or meet the criteria in IFRS 16:B9(a), respectively. Instead, they suggested removing these terms and focus instead on analysing the fact pattern described. One Committee commented that instead of specifying "gross" vs. "net", the focus should be on stating that it is a non-deliverable contract which was discussed in an agenda decision in 2005. He considered this is an important element in determining whether IFRS 16:B9(a) could be met because there is no commitment for delivery of electricity in a non-deliverable contract. The staff agreed with these suggestions.

The Committee decided, by the vote of all, not to add the matter to the standard-setting agenda and to make the suggested edits in the tentative agenda decision.

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