Accounting primer for C&I renewable energy buyers
Most commercial and industrial buyers of renewable energy use a contract structure known as a virtual Power Purchase Agreement (“vPPA”), which exposes them to significant financial volatility, driven by commodity prices, project performance, and the weather.
To help them manage that volatility, two supplemental contract structures now exist: the Settlement Guarantee Agreement (“SGA”) and the Volume Firming Agreement (“VFA”).
Like a traditional vPPA, the SGA and VFA can require complex accounting analysis, and the application of the appropriate financial accounting requires not only a clear understanding of the nature of the transaction and the rights and obligations of its parties, but also the ability to appropriately navigate through the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”).
This guide, a team effort from CohnReznick and REsurety, provides summaries of the SGA and VFA contract structures as well as an illustrative case study for each product. It also includes a CohnReznick accounting analysis that offers perspectives on three key questions with which to evaluate these contracts:
- What is the appropriate unit of account?
- Does the contract contain a lease?
- Does the contract contain a derivative?
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