What is the Contracts for Difference scheme?
The Contracts for Difference (CfD) scheme is the government’s main mechanism for supporting the deployment of low-carbon electricity generation. CfDs incentivise investment in renewable energy and reduce the cost of capital by providing developers of projects with high upfront costs and long lifetimes with direct protection from volatile wholesale electricity prices. This also protects consumers from paying increased support costs when electricity prices are high as it is a condition that generators pay consumers back when the ‘reference price’ exceeds the ‘strike price’.
Renewable projects located in Great Britain that meet the eligibility requirements can apply for a CfD. There have been five auctions, or allocation rounds, to date (between 2015 and 2023), which have seen a range of different renewable technologies competing directly against each other for a CfD.
Developers of new renewable projects who are successful in an auction will enter into a private law contract – the CfD – with the Low Carbon Contracts Company (LCCC). Once developers have constructed their project and start to generate electricity, they are paid a flat (indexed) rate for the electricity they produce over a 15-year period – the difference between the ‘strike price’ (which is determined by the competitive auction) and the ‘reference price’ (a measure of the average market price for electricity in the GB market) for each unit of green electricity generated.
Payments to generators under the CfD scheme are funded by amounts collected from electricity suppliers in advance using the CfD Supplier Obligation Levy. Any payments from generators to the LCCC are returned to electricity suppliers via reconciliation of the levy. It is expected that suppliers will pass on the net cost of the CfD levy to consumers through electricity bills.
Who are the CfD delivery partners?
- The Department for Energy Security and Net Zero sets the policy and governance arrangements for the scheme, including the allocation rules, timing and budgets of allocation rounds, and Administrative Strike Prices.
- National Grid Electricity System Operator (Electricity Market Reform Delivery Body) is responsible for managing and operating the front end of the process, including registration, CfD applications, assessing the eligibility of applications for generic CfDs, conducting reviews for non-qualification (Tier 1 Disputes), and CfD allocation.
- The Low Carbon Contracts Company is the CfD counterparty under the regulations, responsible for processing requests for minor and necessary modifications at the outset of an allocation round, issuing CfDs in accordance with the CfD allocation, managing CfDs through various milestones during the project delivery phase, and making CfD payments during the operations phase.
- Ofgem is responsible for handling Tier 2 application appeals.