Category: Accounting

Is a Solar PPA On or Off Balance Sheet? (IFRS 16)

Most solar PPAs stay off balance sheet as service contracts, but IFRS 16 can pull them on. What finance directors check before signing in 2026.

Most UK commercial solar PPAs are designed to stay off balance sheet, accounted for as service contracts where you pay per kWh delivered. But IFRS 16 can pull a PPA on balance sheet if the contract is, in substance, a lease of an identified asset you control. The outcome turns on contract drafting, not on calling it a "PPA".

Why "off balance sheet" is the whole point for many buyers

The original appeal of a solar power purchase agreement is that a third party funds, owns and operates the system on your roof or land, and you simply buy the generated electricity. No capital outlay, no asset on your books, no matching liability. For a finance director managing covenant headroom, gearing ratios or return-on-capital-employed targets, keeping a six-figure solar asset off the balance sheet is often as valuable as the energy saving itself.

That is the intended treatment — but it is not automatic. The accounting follows the substance of the contract, and IFRS 16 (and FRS 102's revised lease section for entities reporting under UK GAAP) sets a specific test. Understanding how a solar PPA works at the contractual level is what lets you predict the accounting answer before you sign, rather than discovering it in the audit.

The IFRS 16 lease test, applied to a PPA

IFRS 16 asks whether a contract "contains a lease". A PPA contains a lease only if it conveys the right to control the use of an identified asset for a period in exchange for consideration. Two conditions must both be met for control to pass to you as the off-taker:

• Right to obtain substantially all the economic benefits from using the identified asset throughout the period of use.
• Right to direct the use of the asset — deciding how and for what purpose it is used.

There is a prior question too: is there even an identified asset? The PV array on your specific roof is usually identified (it is physically distinct and cannot be readily swapped). So the decisive issue for most PPAs is the second limb — who directs the use of the system.

Why standard PPAs usually fall outside IFRS 16

In a well-drafted on-site PPA, the generator's SPV (special purpose vehicle) retains operational control. The provider decides when to generate, sets maintenance schedules, manages curtailment, controls inverter settings and bears performance risk. You take the output and pay per kWh, but you do not direct how the asset operates. Because the off-taker does not direct use, the contract is treated as a service arrangement, the payments hit the P&L as operating expense, and nothing capitalises. That is the off-balance-sheet outcome buyers want, and it is the default for the structure described on our how a solar PPA works page.

When a PPA gets pulled on balance sheet

The treatment flips when the contract gives you, the off-taker, the substance of control. Watch for these drafting features — any one can trip the lease test:

• You take all the output and pay a fixed capacity charge regardless of generation (looks like paying for the asset, not the electricity).
• You set or instruct the operating regime, output profile or dispatch.
• The contract grants a bargain purchase option or peppercorn transfer at term that makes ownership economically inevitable.
• The term covers substantially all of the asset's useful economic life with you bearing residual value risk.
• You carry the performance and obsolescence risk rather than the provider.

If the substance is that you control and benefit from a specific asset for most of its life, IFRS 16 requires you to recognise a right-of-use asset and a corresponding lease liability — the very outcome an off-balance-sheet structure was meant to avoid. This is why how the deal is funded and structured matters: read how a PPA is funded to see why a genuine third-party-financed SPV is what preserves service-contract treatment.

PPA vs lease: the accounting fork in one table

The cleanest way to see the boundary is to compare a service PPA against an explicit operating lease of the same system. We cover the commercial trade-offs in depth on the compare PPA vs buying analysis, but the accounting summary is below.

Feature	Service PPA (off balance sheet)	Solar lease (on balance sheet)
What you pay for	Electricity delivered (£/kWh)	Use of the equipment (fixed rental)
Who directs the asset	Provider / SPV	You (the lessee)
IFRS 16 outcome	Service contract — expense as incurred	Right-of-use asset + lease liability
Balance sheet impact	None (P&L only)	Asset and liability recognised
Gearing / covenants	Unaffected	Liability increases gearing
EBITDA optics	Cost sits in operating costs	Depreciation + interest split improves EBITDA

Note the EBITDA nuance: counter-intuitively, an on-balance-sheet lease can flatter EBITDA because the charge splits into depreciation and interest below the EBITDA line, whereas a service PPA sits fully within operating costs. Finance directors optimising for headline EBITDA versus gearing sometimes reach opposite conclusions — which is exactly why the choice between a compare PPA vs buying route and a lease should be modelled, not assumed.

How contract term length feeds the test

Term is one of the strongest signals auditors weigh. A PPA running 15–25 years across substantially all of the panels' ~25–30 year design life, combined with you bearing residual risk, leans toward lease classification. A shorter term, with the provider retaining the asset and decommissioning obligation at the end, supports service treatment. The mechanics of duration, break clauses and end-of-term options are set out on our PPA contract term page — and they are not just commercial levers, they are accounting levers. Lengthening a term to shave the unit rate can inadvertently change the balance-sheet answer.

What finance directors actually check before signing

From the diligence we see across UK commercial off-takers, the FD's accounting checklist before a PPA reaches the board is consistent:

1. Does the contract identify a specific asset, and if so, who directs its use day to day?
2. Are we paying for output (kWh) or for availability/capacity of equipment?
3. Is there any purchase option, and is it priced at fair market value or below?
4. What share of the asset's economic life does the term cover, and who holds residual value risk?
5. Does the funding structure use a genuine third-party SPV that retains ownership and operational risk?
6. Has the audit team confirmed service-contract treatment in writing for this specific draft?

The single most important action is the last one: get your auditor to review the actual contract, not a generic "PPA". Two PPAs with the same headline tariff can land on opposite sides of IFRS 16 depending on clauses most procurement teams never read. Where off-balance-sheet treatment is a board requirement, brief your provider early so the drafting is built to keep operational control — and therefore the asset — with the SPV.

Bringing it together

A solar PPA is off balance sheet by design but on balance sheet by accident if the contract drifts into a lease. Treat the IFRS 16 test as a design constraint from day one: structure for output-based payment, third-party operational control, a sensible term and no economically compelling purchase option. Model both the service-PPA and the lease outcome so the EBITDA-versus-gearing trade-off is a decision, not a surprise. If you want the accounting position pressure-tested against indicative commercial terms for your site, request an indicative PPA assessment and we will return a structure and tariff range you can take straight to your auditor.

This article is general guidance for UK commercial energy buyers and is not accounting, tax or legal advice. Confirm the treatment of any specific contract with your auditor under the reporting framework that applies to your entity (IFRS or FRS 102).