Contract for Difference (CfD)
A support scheme or contract in which a generator receives the difference between a fixed strike price and a market reference price, paying back when prices exceed it.
A contract for difference (CfD) stabilises generator revenue around an agreed strike price. The generator sells power in the normal market; when the reference price is below the strike, the counterparty pays the difference, and when it is above, the generator pays back. This two-sided design protects consumers from windfall profits during price spikes.
The UK pioneered auctioned CfDs in 2014. Offshore wind strike prices fell from about 140 GBP/MWh (2012 prices) in Allocation Round 1 (2015) to about 37 to 40 GBP/MWh in AR3 (2019). After cost inflation, AR5 (2023) attracted no offshore wind bids, and AR6 (2024) cleared offshore wind at about 59 GBP/MWh (2012 prices). Hinkley Point C's nuclear CfD is 92.50 GBP/MWh (2012 prices) for 35 years.
The EU electricity market reform (2024) requires that new public support for wind, solar, geothermal, hydro without reservoirs and nuclear use two-sided CfDs from 2027. France, Poland, Ireland, Italy and Spain have adopted CfD auctions.
Compared with a feed-in tariff, CfDs keep generators exposed to market dispatch signals; compared with one-sided premiums, they claw back excess revenue. Low revenue risk can reduce the WACC by 1 to 3 percentage points, lowering LCOE materially for capital-intensive technologies.
Related terms
All terms →- PPA (Power Purchase Agreement)
A long-term contract under which a buyer agrees to purchase electricity from a specific generator at a set price or price formula.
- Feed-in tariff
A policy that guarantees renewable generators a fixed price per kWh exported, usually for 15 to 20 years, independent of market prices.
- LCOE (Levelized Cost of Electricity)
The constant price per MWh that recovers all lifetime costs of a power plant, discounted to present value, divided by its discounted lifetime output.
- WACC
Weighted average cost of capital: the blended return required by debt and equity investors, used as the discount rate for energy projects.
- Offshore wind
Wind turbines installed in seas or large lakes, usually on fixed foundations in water up to about 60 m deep, exploiting stronger and steadier winds than onshore sites.
- Capacity market
A mechanism that pays resources for being available to supply power or reduce demand at times of system stress, alongside payments for energy.