Nature-dependent electricity contracts

What are the amendments for the own-use exemption?

It is not always clear under IFRS 9 whether a company that purchases electricity through PPAs can apply the own-use exemption for accounting purposes. If the own-use exemption does not apply, then PPAs are accounted for as derivatives measured at fair value through profit or loss (FVTPL). PPAs are often long-term agreements, so measuring them at FVTPL can potentially create significant volatility in the income statement over many reporting periods.

To apply the own-use exemption to a PPA, IFRS 9 currently requires companies to assess whether the contract is for receipt of electricity in line with the company’s expected purchase or usage requirements – e.g. the purchaser expects to use the quantity it buys, and then actually uses it.

The challenge arises due to the unique characteristics of electricity, including the difficulty to store it, and its market structure – i.e. if a purchasing company is not able to use the electricity within a short period, the electricity has to be sold back to the market within a specified time. Although these sales occur because of the market structure, and not to profit from short-term price fluctuations, it is unclear if the company can apply the own-use exemption under existing requirements.

The amendments allow a company to apply the own-use exemption to PPAs if the company has been, and expects to be, a net-purchaser of electricity for the contract period.

The amendments apply retrospectively using facts and circumstances at the beginning of the reporting period of initial application (without requiring prior periods to be restated). 

What are the amendments for hedge accounting?

Virtual PPAs³ and PPAs that do not meet the own-use exemption are accounted for as derivatives and measured at FVTPL. Applying hedge accounting could help companies to reduce profit or loss volatility by reflecting how these PPAs hedge the price of future electricity purchases or sales.

Under IFRS 9, to apply hedge accounting there needs to be an economic offset between changes in the value of hedging instruments and hedged transactions.

Buyers and sellers of PPAs face challenges when applying cash flow hedge accounting under IFRS 9. This is because the fair value of the hedging instrument (PPA) is based on a P50 estimate⁴, but the hedged transaction is required to be based on a P90 estimate⁵ due to the requirement for a hedged transaction to be highly probable. This creates a mismatch that could lead to the hedging relationship not qualifying for hedge accounting.

Subject to certain conditions, the amendments permit companies to designate a variable nominal volume of forecasted sales or purchases of renewable electricity as the hedged transaction, rather than a fixed volume based on P90 estimates. The variable hedged volume is based on the variable volume expected to be delivered by the generation facility referenced in the hedging instrument. This would facilitate an economic offset between the hedging instrument and the hedged transaction, enabling companies to apply hedge accounting.

The amendments apply prospectively to new hedging relationships designated on or after the date of initial application. They also allow companies to discontinue an existing hedging relationship, if the same hedging instrument (i.e. the nature-dependent electricity contract) is designated in a new hedging relationship applying the amendments.

What are the new disclosure requirements?

A company may apply the own-use exemption to certain PPAs under the amendments and therefore would not recognise these PPAs in its statement of financial position. Where this is the case, a company is required to disclose further information such as:

• contractual features exposing the company to variability in electricity volume and risk of oversupply;
• estimated future cash flows from unrecognised contractual commitments to buy electricity in appropriate time bands;
• qualitative information about how the company assessed whether a contract might become onerous; and
• qualitative and quantitative information about the costs and proceeds associated with purchases and sales of electricity, based on the information used for the ‘net-purchaser’ assessment.

In addition, for PPAs designated in a cash flow hedging relationship, companies need to disaggregate the information disclosed about terms and conditions by risk category.

Effective from 1 January 2026

The amendments apply for reporting periods beginning on or after 1 January 2026.

Early application is permitted. To find out more about the amendments, speak to your KPMG contact.

_{1 The amendments apply only to contracts referencing nature-dependent electricity in which a company ‘is exposed to variability in the underlying amount of electricity because the source of electricity generation depends on uncontrollable natural conditions (e.g. the weather)’.}

_{2 For the purposes of this article, when the term PPA is used it refers only to PPAs in scope of the amendments (refer to footnote 1).}

_{3 A virtual PPA (vPPA) is a contract for difference where the purchaser and the seller net settle periodically in cash for each unit of power generated (on the basis of the difference between the fixed price agreed at contract inception and the current spot market price on each periodic settlement date). If the fixed price exceeds the spot price, then the purchaser pays the difference to the seller and vice versa. Under vPPAs, there are no physical transfers of power and hence the own-use exemption does not apply.}

_{4 A P50 estimate indicates the volume of energy production expected to be exceeded with 50 percent probability.}

_{5 A P90 estimate indicates the volume of energy production expected to be exceeded with 90 percent probability. By definition, the P90 volume estimate will be lower than the P50 estimate.}