Debate on the Contracts for Difference scheme

The Library briefing Contracts for Difference Scheme (October 2023) provides an overview of the CfD scheme, the projects it has delivered and its value to generators and costs to consumers. It also covers stakeholder commentary on the most recent CfD auction and the changes under consideration.

The Government’s primary mechanism for supporting new low carbon power infrastructure is the Contracts for Difference (CfD) scheme.

CfDs work by guaranteeing a set price for electricity – known as a strike price – that generators receive per unit of power output. As the wholesale price of electricity fluctuates, the generator is either paid a subsidy up to the set price, or pays back any surplus above the set price to the scheme, so that they have the certainty of always receiving the value of the strike price. The cost, or benefit, is passed on to consumers through their bills.

The fifth CfD auction round, which took place in 2023, delivered a record number of solar, onshore wind, tidal, and geothermal projects. However, although offshore wind was the dominant technology in previous CfD auction rounds, the fifth auction round did not attract any bids from offshore wind developers. This result was widely criticised by representatives from the offshore wind industry.

Changes are being considered to the CfD scheme under the government’s Review of Electricity Market Arrangements and additional consultations. These include proposals to partially expose CfD generators to wholesale prices, introduce a revenue ‘cap and floor’, or to base the revenue received by a generator on a prediction of how much it would generate in particular location, instead of its actual output.