Contracts for Difference (CFD) supports new investment in low-carbon electricity generation and provide long-term revenue stability for generators, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers overall. By providing a guaranteed minimum price for electricity, investors have greater certainty in their return on investment, so are potentially more likely to invest.
CFDs require generators to sell electricity into the market as usual, through a Power Purchase Agreement (PPA) with a supplier, but reduce exposure to variations in electricity prices by providing a variable top-up from the market price to a pre-agreed ‘strike price’.
At times when the electricity market price exceeds the strike price, the generator is required to pay back the difference, thus protecting consumers from over-payment.
Find out more about Contracts for Difference on the UK government website.