Solar Power Purchase Agreements are on the rise in Australia. Solar PPAs are regulated primarily through AER’s (and in Victoria, the ESC’s) retail and network exemption framework. This presentation follows on from our earlier webinar on PPAs. We address two current PPAs compliance challenges for solar PPAs: The new lease accounting standard and metering requirements.
What is a Power Purchase Agreement (PPA)?
- A contract to purchase electricity at a pre-determined price for a fixed period.
- PPAs take a variety of forms physical/virtual, behind-the-meter/market, solar/non-solar.
- Each type of PPA presents an opportunity as well as certain potential costs.
Regulatory Framework for PPAs
Generally, applicable laws and regulations govern PPAs such as:
- Australian Consumer Law
- The Corporations Act 2001, including Part 2M.3 Financial Reporting
Sector Specific Rules
Standard solar PPA form is governed by retail and network exemptions frameworks administered by the AER and the ESC (Vic).
New Regulatory Challenges
1. IFRS 16/AASB 16
The new accounting standard, AASB 16, may require PPA purchasers to change the way they report PPAs.
Generally, operating leases will now be a ‘right-of-use’ asset with a corresponding lease liability. They will now be ‘on balance sheet’.
2. PPA METERING
There is some confusion amongst PPA businesses as to metering obligations
Recently clarified by the AER in its Quarterly Compliance report.
The existing (old) standard
Operating and finance leases are distinct for both lessees and lessors.
Operating Leases expensed rather than listed as an asset.
Operating leases ‘off’ balance sheet.
The new test
A contract AASB 16 collapses the distinction between operating and finance leases for lessees. This means that most leases must now be ‘on’ balance sheet. It introduces a new test:
A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration (AASB 16, para 9).
Right to control
The right to obtain substantially all of the economic benefits from use of the identified asset; and the right to direct the use of the identified asset (AASB, Appendix B9)
THE AASB 16 CHALLENGE FOR PPAs
- PPA purchasers need to consider whether existing PPAs incorporate and are now ‘on balance sheet’. This has a range of effects.
- Impact on net debt, debt-to-equity, return on assets, quick ratio.
- Effect on profitability, EBITDA, operating cash flows.
- Effect on KPIs, including debt covenants, remuneration, bonuses etc.
Deloitte Touche Tohmastu. Leases: A Guide to AASB 16, p100.
Second and third examples
From Deloitte Touche Tohmatsu. Leases: A Guide to AASB 16, p100.
Metering and behind the meter PPAs
Metering requirements for ‘on-market’ PPAs supplied through the grid, subject to National Electricity Law, National Electricity Rules and associated procedures including the Metrology Procedure.
In its recently released Quarterly Compliance Report, AER reported a number of inquiries from solar providers about metering requirements for Solar PPAs.
Consequently AER has confirmed those requirements that apply to ‘behind-the-meter’ solar PPAs.
Solar PPA metering
Behind-the-meter Solar PPAs are not subject to the same metering requirements as on-market solar PPAs.
In virtue of the network exemption guideline, they are subject to the accuracy requirements of the National Measurement Act. This means only meters with National Measurement Institute pattern approval are compliant with both the conditions of network exemption and federal law. Go to http://www.measurement.gov.au/Publications/PARequirements/pages/default.aspx
Note. These PPAs also have obligations under Schedule 7.4 of the NER which sets out technical inspection and testing requirements.