Opportunities for structured, diversified energy procurement and risks in accounting

Structured and diversified energy procurement contracts: A key to business success

Optimising energy procurement and managing risks proactively are critical success factors for energy suppliers and energy-intensive companies. The growing share of nature-dependend energy, the need for more flexible energy markets, the shortage of readily available energy capacity, the gas crisis and peak demand have driven prices up, but also intensified their volatility and have led to more negative electricity prices. Hedging energy price risks through procurement modeling, and meeting liquidity requirements for margin calls, presents challenges.

Complex energy procurement contracts include a wide range of hedging measures and offer a high degree of flexibility, and have therefore long been the focus of financial instrument specialists.

The classification of an energy procurement contract or a pricing mechanism as a financial instrument is not based on its nature or its complex structure itself. However, contracts may contain financial derivatives or even fall within the scope of IFRS 9 Financial Instruments as a whole, for example, if there is a cash settlement. Bonus-malus arrangements, minimum purchase commitments, baseline deliveries, tolerance bands for delivery periods, sell-back options, contract termination clauses, and even contractual penalty clauses – all of these can lead to cash settlements.

Contractual freedom is invoked when structuring contractual relationships (e.g. implementing an agreement on physical or financial sleeve transactions). However, trends towards standardisation can also be observed (e.g. use of ISDA, DRV or EFET contracts).

Energy supply contracts can also be linked to participation in demand response and Demand Side Response (DSR) programmes, in order to save costs through optimised energy consumption, make greater use of nature-dependend energy and strengthen grid stability. These load management programmes can also be a new source of revenue.

Moreover, there are also contracts with physical electricity supply obligations that are linked to Congestion Revenue Rights (CRRs) or Financial Transmission Rights (FTRs), in order to stabilise electricity costs and generate profits. CRRs and FTRs are themselves financial instruments.

Collateral clauses in contracts are becoming increasingly important and diverse. The collateral provided may be contracts within the scope of IFRS 9 Financial Instruments. 

Climate protection and energy supply security: Challenges for accounting

Complex contracts – particularly those relating to nature-dependent energy sources – make it difficult to assess the intended purpose of a contract at the outset. Furthermore, unforeseeable circumstances may mean that the planned purchase of energy for internal use necessitates a partial resale. The IASB’s amendment to IFRS 9 and IFRS 7, relating to power generation contracts and issued in December 2024, allows for the sell-back of surplus energy in nature-dependent energy procurement contracts to be compliant with the application of the internal use exemption under certain conditions. Companies in hedging relationships can also designate a variable nominal volume as the hedged item. This is associated with an expansion of the disclosures in the notes. As the IASB amendment is mandatory for fiscal years beginning on or after 1 January 2026 and must be applied retrospectivly (prospectively only for hedge accounting), existing contracts will have to be reassessed.

Climate protection and sustainability are the subject of accounting guidelines issued by the national professional association. The FAB recently issued a statement on the reporting of climate protection agreements and determined that climate protection contracts meet the definition of a derivative under IFRS 9 Financial Instruments. In May 2024, the FAB published an IDW guideline on HGB accounting for primary financial instruments with sustainability-related features.

This means that the accounting challenges must be addressed not only when preparing financial statements, but also when concluding new energy supply contracts.