Does a solar PPA go on your balance sheet?

Quick answer: Possibly on. A PPA is sold as an off-balance-sheet way to get solar, but if the agreement gives your business the right to control the use of identified equipment it can contain a lease for accounting purposes — and under the revised FRS 102 most leases sit on the lessee’s balance sheet for accounting periods beginning on or after 1 January 2026. The label on the contract does not decide it.

“No capital outlay, and it stays off your balance sheet” has been one of the strongest lines in the commercial solar PPA pitch. For accounting periods beginning on or after 1 January 2026 it needs re-examining, because the standard most UK companies report under has changed.

What changed in FRS 102

Following the Financial Reporting Council’s periodic review, the revised FRS 102 brings most leases onto the lessee’s balance sheet: you recognise a right-of-use asset and a matching lease liability, rather than simply expensing the rentals as they fall due. Two exemptions survive — short-term leases of 12 months or less, and low-value leases, judged by the nature of the underlying asset — and a multi-year solar agreement will not normally meet either. One further limit matters for smaller businesses: FRS 105, which micro-entities use, was deliberately left unchanged by the same review, so a micro-entity’s operating leases stay off balance sheet.

That change was aimed at leases generally, not at PPAs. But it matters here because of a prior question most businesses skip.

The question that actually decides it

The issue is not whether the document is called a power purchase agreement. It is whether the arrangement contains a lease.

Broadly, an arrangement contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Applied to rooftop solar, the honest answer is “it depends on the terms”, and the terms vary a lot:

• The equipment is certainly identified — it is bolted to your roof and nobody is swapping it out.
• Whether you control its use is the live question. If you take essentially all of the output, direct how the system is operated, and the supplier has no practical ability to substitute it, that looks much more like a lease than a simple supply of electricity.
• If you buy only the power actually delivered at a unit rate, the funder retains operational control and dispatch decisions, and you have no say over the asset, it looks more like a supply contract.

This is a judgement on the facts of the agreement, and it belongs to your accountant and auditor, not to the funder’s sales pack. Ask the question before signing, not at the year end.

Why it matters beyond presentation

If the arrangement does contain a lease, three things follow:

1. Gearing. A right-of-use asset and lease liability change the look of the balance sheet, which can matter for banking covenants that test leverage or net debt.
2. The profit profile. Instead of a smooth rental expense you get depreciation of the right-of-use asset plus interest on the liability — front-loaded compared with a straight-line charge.
3. Comparability. If you modelled a PPA against owning the system on the basis that one sits off balance sheet and the other does not, the comparison needs redoing.

None of that makes a PPA a bad idea. It removes one of the reasons people choose it without looking further.

How ownership compares

Buying the system — with cash, hire purchase or an equipment loan — does not dodge the balance sheet: the asset and the finance liability both appear. What it does is make the treatment predictable, and it keeps the two things a PPA gives away:

• the capital allowances (the Annual Investment Allowance at 100% on up to £1m a year, and for companies the 50% first-year allowance above that), which only the owner can claim; and
• the export income, which belongs to whoever is entitled to it under the arrangement — the funder, in a PPA.

Our asset finance vs PPA comparison sets the two routes out side by side, including the property questions a PPA raises, and the general accounting change is covered in FRS 102 lease changes for solar in 2026.

What to ask before you sign

• Does this agreement convey the right to control the use of identified equipment? Send the draft to your accountant and ask precisely that.
• If it does, what does the right-of-use asset and lease liability do to our covenants?
• What is the unit rate, and what is the escalator compounded to the final year?
• What happens on a sale of the building, and what is the buy-out price at years five, ten and fifteen?
• Who receives the export payments?

A PPA can still be the right answer — for a business that cannot deploy capital or cannot use the tax relief, it often is. Just choose it for those reasons, not for a balance-sheet benefit that may no longer exist.