What Finance Directors need to know about PPA structures, balance sheet treatment, and long-term energy cost certainty.
Why renewable energy lands on the FD's desk
Renewable energy procurement has moved from the facilities manager's responsibility to a board-level decision. Rising energy costs, volatile wholesale markets, published net zero commitments, and stakeholder expectations mean that energy strategy is now a financial strategy issue. For Finance Directors, the question is no longer whether to consider on-site generation, but how to evaluate the options in terms the board understands: return on investment, balance sheet impact, risk allocation, and budget certainty.
Capital purchase vs PPA: the fundamental choice
The first decision is whether to buy or finance the system. A capital purchase delivers higher long-term returns but requires significant upfront investment, impacts the balance sheet, and transfers all performance and maintenance risk to the buyer. A PPA eliminates the capital requirement, keeps the asset off balance sheet, and transfers performance risk to the provider. The trade-off is clear: higher returns for higher risk and capital commitment, or lower but more certain returns with zero capital outlay. For most organisations, the PPA structure better aligns with how they manage other major operating costs.
Balance sheet and accounting treatment
Under a properly structured PPA, the renewable energy system is the provider's asset, not the consumer's. The energy payments are classified as an operating expense. This means no impact on borrowing covenants, return on capital employed, or capital budget allocation. However, it is important to ensure the PPA is structured correctly to achieve off-balance-sheet treatment under IFRS 16. The key test is whether the arrangement conveys the right to control the use of the asset: a well-structured PPA ensures it does not.
Evaluating PPA rates
The PPA rate should be compared against your current blended cost of grid electricity, not just the commodity rate. Include all pass-through charges: network costs, capacity market charges, renewables levies, and climate change levies, to establish the true cost per kilowatt-hour you are currently paying. The PPA rate should represent a meaningful discount to this blended rate. Be cautious of providers who compare their rate only to the commodity element of the tariff, as this overstates the apparent saving.
Risk allocation
A well-structured PPA transfers several categories of risk from the consumer to the provider. Technology performance risk: if the system generates less than projected, the consumer simply pays less. Maintenance risk: all servicing, repairs, and component replacement are the provider's responsibility. Obsolescence risk: as technology evolves, the risk of operating older equipment sits with the provider. The consumer's primary commitment is the long-term offtake agreement: agreeing to purchase the electricity generated. This is a fundamentally different risk profile from asset ownership.
Due diligence checklist for Finance Directors
Before signing a PPA, verify the provider's financial backing and ability to honour a PPA term that is typically 15 to 20 years for CHP-led designs depending on engine size, up to 25 years for solar-led. Review the escalation mechanism (fixed vs CPI-linked) and model both scenarios over the full term. Confirm the balance sheet treatment with your auditors based on the specific contract terms. Understand the termination provisions and any early exit costs. Check the performance guarantees and the consequences if generation falls below projections. Finally, evaluate the monitoring and reporting capabilities: you need reliable data for both financial management and ESG reporting.
