When a business, body corporate or retirement village signs a Power Purchase Agreement (PPA) for an embedded solar installation, the system is often described as “off balance sheet.” This is because the solar asset isn’t owned by the energy user - it is developed, financed, and operated by a third-party Independent Power Producer (IPP), and the customer simply pays for the electricity produced.

There’s no capital expenditure, no depreciation, and no loan on the customer’s books. Instead, the PPA is treated as an operating expense, similar to buying power from Eskom or a municipality.

For customers, this means solar energy without the asset ownership. It also means cleaner, more reliable energy without weakening the balance sheet or changing key financial ratios like return on assets or debt-to-equity.

The accounting treatment is based on IFRS 16, which governs lease accounting. Under IFRS 16, a PPA could be classified as a lease and put on the balance sheet if it gives the customer control over the use of a specific asset for a period of time. However, most well-structured PPAs avoid this by ensuring that control remains with the Independent Power Producer (IPP), and the customer is simply purchasing a service - the supply of electricity. Since the output of a solar installation varies each month based on irradiance, the customer does not receive a fixed quantity of energy, and thus pays a variable monthly amount. As a result, these PPAs are generally treated as off balance sheet.

One of the core benefits of a third-party-owned embedded solar solution is that the IPP takes full responsibility for operations and maintenance (O&M). This includes the cost of cleaning, replacing parts, enforcing warranties against equipment suppliers, and conducting routine and corrective maintenance. Insurance for the asset is also handled by the IPP. In the case of Decentral Energy, all of these costs are included in the PPA tariff, ensuring the customer is not exposed to unexpected maintenance or performance-related expenses.

Importantly, Decentral Energy also offers performance guarantees under the PPA. If the system fails to meet agreed generation levels averaged over the year, financial penalties apply - borne by the IPP. This creates strong alignment between the interests of the IPP and the customer.

This is one of the key reasons embedded PPAs are attractive to customers looking to reduce costs and carbon without tying up capital.

Note: All potential customers should seek their own professional tax and accounting advice. This article is for general information purposes only and does not constitute accounting, tax or legal advice.

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