Introduction

Pentagon Global Finance is a global professional services firm helping some of the fastest growing companies and SMEs in the world work efficiently and differently whilst reducing risk and delivering value at all times. My name is Luke Clack and I work within the research team here at Pentagon Global Finance (UK). I would also like to thank our CFO Advisory team, led by Arthur Ngoka for their support and insights during my very interesting research.

We’re focused on enabling transformations through systems, re-organisation and people solutions, powered by analytics and insight to drive sustainable change. Whether you’re navigating regulatory changes, managing through a crisis, going public, or experiencing some other major shift in technology, we help put in place Change and Transformation strategies that are built with business results in mind.

The Challenge

The renewable energy sector is rapidly expanding, and with it comes a new set of complexities when it comes to accounting, tax, processes and disclosures. Businesses, accountants, and investors looking to capitalize on the potential of this sector must understand the unique challenges posed by renewable energy investments in order to ensure accurate and compliant accounting practices.

This increased demand for renewable energy globally presents a lot of finance teams with the challenge of managing multiple renewable assets, often through SPVs (Special Purpose vehicles) across various jurisdictions. This presents difficulties such as ensuring control of numerous entities in various stages and adhering to appropriate ownership regulations.

Hence when addressing intricate entity structures for construction financing, partnership changes, purchasing, asset commissioning and decommissioning, generation, transmission and distribution costs, tax equity requirements etc, it is important to ensure that the decision on what systems to adopt for the scaling of renewable businesses, the standardization of their processes, and the involvement of competent financial professionals is prioritized at the earliest opportunity.

 

Complexities of the Renewables Sector

One of the main challenges associated with accounting for renewable energy investments is differentiating between capital and operating expenses. This is especially true and can pose difficulties when dealing with long-term contracts or multi-year projects where the costs such as capital related costs, operational costs such as maintenance and repairs may not be immediately known or easily categorized as either capital or operating expenses.

Additionally, due to the nature of the industry, there may be unique tax considerations associated with renewable energy investments that must be taken into account when filing taxes or preparing financial statements.

Without a clear understanding of which costs are capital-related and which ones being operational, many businesses may find themselves in violation of applicable regulations or reporting incorrect financial information.

In addition to differentiating between CAPEX (Capital) and OPEX (Operating), businesses must also consider how to account for the various incentives associated with renewable energy investments such as tax credits or subsidies. These incentives can have a significant impact on the profitability of an investment but can be difficult to track accurately without specialized knowledge or technology solutions.

Fortunately, there are strategies businesses can use to ensure accurate and compliant accounting for their renewable energy investments. Leveraging technology solutions such as software platforms designed specifically for renewables can help streamline the process of tracking CAPEX/OPEX expenses and incentives associated with renewable energy projects. Additionally, working with experienced professionals from Pentagon Global Finance who understand the complexities of renewables accounting can help ensure accurate financial reporting

 

Other nuanced Challenges for accounting for renewable energy:

1.     Lack of standardization: Different countries have different regulations and standards for accounting for renewable energy, making it difficult to compare results between different regions. To overcome this, renewable organizations should strive to create a common set of standards that can be used across the globe, some of these are already being addressed by international accounting standards eg IFRS16 Leasing accounting standard.

 

Why is this important? Because establishing a uniform method for measuring and reporting renewable energy production is essential, particularly because accurate measurements can help inform policy decisions about how to best utilize renewable energy sources.

Also;

·       knowing the exact amount of energy produced from renewable sources can help identify potential areas for improvement and better utilization of resources.

·       Having accurate data on the amount of energy produced from renewable sources can help inform consumers about the environmental impacts of their energy consumption choices.

·       Accurate measurements can help businesses make informed decisions about investments in renewable energy technologies and projects.

On the other hand, it is also worth noting that standardization in determining the exact amount of energy produced from renewable sources requires expensive equipment and technology that may not be readily available in some parts of the world or to certain groups of people. Also the cost associated with standardizing and collecting accurate data on renewable energy production could limit its use as a tool for informing policy decisions at all levels, including local, regional, national and international levels.

 

2.     Complexity of data: Renewable energy sources generate large amounts of data which can be difficult to interpret and analyze. To overcome this, renewable and Cleantech organizations should invest in better software solutions that can help them manage and analyze their data more effectively. Overall, obtaining accurate accounting data in the renewable energy sector is a complex process that requires careful consideration of multiple factors including technology advancements, costs associated with collection methods, regulatory requirements, and international market dynamics.

 

Why is this important? Due to the global nature of renewable energy development, obtaining reliable data from international markets can be difficult. Different countries have different regulations regarding the collection and use of accounting information related to renewable energy projects.

As previously highlighted in my introduction, it is extremely important to start early to consider the most appropriate ERP, Accounting and Billing systems that can capture renewable energy production costs and data accurately, competent systems should be able cope with capturing, accounting, consolidating and reporting on the different stages of due diligence costs, development costs, commissioning and decommissioning of assets, new acquisitions and disposals by entity and sometimes by jurisdiction, also later stage tracking and accounting for generation, transmission and distribution costs eg for onshore and offshore wind farms or Solar.

 

3.     Lack of expertise: As this a is a fairly new phenomenon i.e the huge drive and demand for Cleantech and Renewables, many renewables and cleantech organizations lack the knowledge and expertise needed to properly account for renewable energy sources. Some Renewable and Cleantech organizations may not have the necessary resources available to properly account for renewable energy costs. This could include inadequate staff, limited access to data and software, or a lack of understanding of how to accurately track and report renewable energy costs. Without the proper resources, organizations may be unable to accurately assess the true cost of their renewable energy investments.

The accounting for renewable energy costs is still an emerging field, with no clear industry standards or guidelines available. This can make it difficult for organizations to accurately report on their renewable energy investments, as they may not have access to reliable information on how best to account for these costs.

Many countries do not have adequate regulations or oversight when it comes to accounting for renewable energy costs. Without this oversight, organizations may be able to get away with inaccurate reporting or even fraudulent activity related to their investments in renewable energy sources.

To overcome this, companies should hire experts in the field or outsource their accounting needs to a specialized firm like Pentagon Global Finance. We are uniquely positioned to offer accounting and CFO advisory solutions to scaling businesses in the renewables sector.

 

4.     High costs: Accounting for renewable energy sources can often be expensive due to the complexity of the task and the need for specialized software solutions and personnel.

To reduce the cost of managing the accounting for renewables, businesses can opt to outsource their accounting needs to a third-party provider or managed services by Pentagon Global Finance. This can be done on an ongoing basis or as needed, depending on the size and complexity of the project.

Additionally, businesses can invest in specialized software assessed, scrutinised and recommended by our experts, designed to streamline and automate certain aspects of renewable energy accounting. This will reduce the amount of manual labour required and thus lower costs associated with personnel.

Furthermore, businesses should look into utilizing cloud-based solutions for their accounting needs as this will eliminate the need for additional hardware and maintenance fees. Finally, businesses can also look into utilizing open source software solutions that are freely available online and have been tested by other users in order to ensure accuracy and reliability or look at creating partnerships with other companies in order to share resources and costs.

 

5.     Long-term planning: Accounting for renewable energy requires long-term planning in order to accurately predict future demand and ensure sufficient supply is available when needed. This planning must consider the seasonal and annual variations in energy demand, as well as any external factors that may affect supply.

It is also important to consider the cost of renewable energy sources, such as solar or wind power, and how these costs can be offset by other sources of energy. Long-term planning should also take into account the potential for new technologies to reduce the cost of renewable energy sources and increase their availability.

Finally, it is essential to consider the environmental impacts of renewable energy sources and how they can be minimized. To overcome this, organizations should develop strategies that take into account both current trends as well as potential future changes in technology or regulations that could affect their operations in the future.

 

For more information on how you can benefit from our services, you can contact me directly on:

Email: luke.clack@pentagonfinance.com

Tel: +44(0)7402 464 094 Office: +44(0)203 290 8500