Contract for difference (CfD) for renewables
A public contract that locks in a strike price for the generator: the state pays the gap when the market is low, the generator pays it back when it is high. Born in the UK in 2015, made the EU norm by the 2024 reform.
February 26, 2015: London publishes the results of the first contracts for difference allocation. Twenty-seven projects, including two offshore wind farms, Neart na Gaoithe at 114.39 £/MWh and the first phase of East Anglia One at 119.89 £/MWh, in 2012 prices. The generator sells its power on the market. A public counterparty, the Low Carbon Contracts Company, pays it the gap when the reference price falls below the strike price, and the generator pays the gap back when the price rises above it. Over fifteen years, indexed to inflation, each MWh produced is worth the strike price. Regulation (EU) 2024/1747, which reforms the design of the electricity market, made the two-way CfD the required form of direct public support for new wind, solar, geothermal, run-of-river hydro and nuclear plants, after a three-year transition, with equivalent schemes allowed. Excess revenues go back to final customers. For business interruption, the contract simplifies the calculation. A lost MWh is valued at the strike price, not the market price of the day, and the adjuster no longer has to rebuild a counterfactual price curve: the sum insured stays within a few percent from one year to the next. Two caveats. Recent contracts pay nothing during negative-price hours, and those hours are worth nothing in business interruption either. Delay, above all: the contract sets a target commissioning window, the fifteen-year term shortens when the window is missed, and a longstop date opens termination. A construction loss can therefore cost years of guaranteed price at the end of the contract, a loss that the delay in start-up policy does not always see, depending on its indemnity period.
Textbook case, in numbers. A 400 MW farm under a CfD at 80 £/MWh loses its export cable for 60 days, at a 45% capacity factor: 400 x 24 x 0.45 = 4,320 MWh per day. The business interruption policy carries a 30-day waiting period. Indemnity: 30 x 4,320 = 129,600 MWh x 80 £ = 10,368,000 £, whether the market traded at 50 £ or 150 £ during the outage. The same farm without a CfD, at an average price of 60 £, would have claimed 7,776,000 £, and the adjuster would have argued hour by hour.
CfD, two-way CfD, strike price contract, two-sided contract for difference
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