The Contract for Difference (CfD) scheme is the government’s main mechanism for supporting the deployment of new low carbon electricity generation. It has been designed to reduce the cost of capital for developers bringing forward low-carbon projects with high up-front costs and long payback times, whilst minimising costs to consumers.
Low-carbon generation located in Great Britain that meets the eligibility requirements can apply for a CfD during a competitive allocation round. There have been two CfD allocation rounds to date (in 2015 and 2017), in which a range of different renewable technologies compete directly against each other in sealed bid auctions.
The outcome of these allocation rounds will define costs for consumers and the “generating capacity” procurement targets, set by the government, are the primary mechanism that controls the number of projects supported and the price associated with that support.
Developers of new renewable projects who are successful in an auction will enter into a private law contract with the , referred to as the CfD. Once they have constructed their Project and start to generate electricity they are paid the difference between the ‘strike price’ (which is determined by the competitive auction) and the ‘reference price’ (a measure of the market price for electricity in the GB market) for each unit of green electricity exported. ( )
Holding a CfD provides certainty and stability of revenues to new electricity generators, by reducing their exposure to volatile wholesale prices. It also protects consumers from increases to electricity prices as it is a condition that generators pay consumers back when the reference price exceeds the Strike Price. Payments from LCCC to low carbon generators are funded by amounts collected from electricity suppliers in advance using the CfD Supplier Obligation levy. Payments from generators to LCCC are returned to electricity suppliers via reconciliation of the levy.