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Free users cannot access embedded reports in SharePoint even if they have the correct access and the report resides in premium capacity. They can see the reports in the POwer BI app with a free license but not as a SharePoint embedded link. If we upgrade them to PowerBI Pro, they can then see the report as an embedded SharePoint link. In addition, we found that when a user is upgraded to a power bi pro license, they still cannot access embedded SharePoint reports until they visit the PowerBI app. Following that first visit, they can view the embedded SharePoint reports.
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