What are Power Purchase Agreements?
Power Purchase Agreements (PPAs) are contracts between parties that generate electricity (generators) and those looking to purchase electricity (off-takers).
A PPA provides electricity price certainty for the generator and off-taker through a long-term contractual framework.
Renewable energy generators create green products, such as large-scale green certificates, which are tradeable.
PPAs don't involve the actual sale of electricity. Instead, the off-taker receives its electricity from a retailer in the National Electricity Market (or equivalent local market) and the PPA includes a Contract for Difference (CfD). The CfD acts as a financial arrangement to hedge against price volatility of electricity by covering the difference between a fixed price and the fluctuating market price for renewable energy that's generated, also known as the floating price.
If the floating price exceeds the fixed price, the generator pays the off-taker the difference. If the fixed price exceeds the floating price, the off-taker pays the generator the difference.
Bundled PPAs
There are PPAs where the generator ‘bundles up’ the supply of the entry into the CfD with the supply of green products they generate, in return for the off-taker entering into the CfD. These agreements are commonly known as Bundled PPAs (BPPAs).
Supplies made under a BPPA for GST purposes
In the BPPAs we have considered, the:
- generator supplies
- a derivative when they enter into the CfD
- green products in return for non-monetary consideration from the off-taker, being their entry into the CfD
- off-taker supplies a corresponding derivative when they enter into the CfD.
The supply of:
- a derivative is an input-taxed financial supply
- the green products is a taxable supply, where the generator and off-taker are located in Australia.
Attribution of GST on the green products
It's common for a BPPA to cover a long period (typically 10–15 years), with green products transferred as they're generated over the life of the agreement.
In the BPPAs we have considered, consideration provided in return for the taxable supply of green products under a BPPA is non-monetary consideration, being the initial entry into the CfD by the off-taker.
In these circumstances, the attribution of the GST payable on the supply of all the green products over the period of the agreement occurs in the tax period the agreement is entered into, or when any conditions precedent are satisfied or waived. This is because the non-monetary consideration is received upfront. Therefore, the timing of the supply of green products or issuing of invoices for them will not reflect the correct attribution period for GST purposes.
There may be other types of BPPAs we haven't considered, where the consideration for the green products is not received upfront. If the analysis of the agreement indicates separate consideration is payable, other than the entry into the CfD for the green products, the attribution of the GST payable on the supply of the green products may be different.
For more information, see Reviewing your contracts.
Valuation of non-monetary consideration
Guidance on how to value non-monetary consideration is provided in Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration.
It may be difficult to value the CfD non-monetary consideration. As explained in GSTR 2001/6, you may choose to value the green products instead. However, valuing the green products to be supplied over the period of the contract may be difficult given the quantum is unknown.
As also explained in GSTR 2001/6, when the parties are unrelated, the generator may use a reasonable method that is agreed to with the off-taker in determining the GST-inclusive market value of the green products. You can use valuation methodologies that are consistent with professional guidelines (see paragraph 154 of GSTR 2001/6).
Reviewing your contracts
It's important to review your contracts and check whether they correctly attributed the GST payable or the GST credits claimable to the relevant tax periods. Keep in mind that the off-taker has a 4-year credit time limit for claiming GST credits.
If you have BPAA arrangements involving different facts to those we've described and you're unsure about your individual circumstances, you can:
- request an early engagement discussion, or
- apply for a private ruling yourself or jointly with the other party.