Briefing Paper: Contracts for Difference

Disclaimer: this information is accurate as of July 2015. The timing of Round 2 will be announced in autumn
2015, and the allocation framework for Round 2 will be released subsequent to this announcement.

Eligibility criteria for CFDs in each Round is set out in in the allocation framework and include: applicable
planning consents; connection agreements; non-receipt of funds under other Government support schemes;
evidence of incorporation; target commissioning window; and any supplemental requirements.

Background
Electricity Market Reform (EMR) is a Government policy to incentivise investment in secure, low-carbon
electricity, improve the security of Great Britain’s electricity supply, and improve overall affordability of
electricity for consumers. The EMR policy is to be achieved through two key mechanisms:

 A Capacity Market (CM)1, to ensure security of electricity supply at the least cost to the consumer.
 Contracts for Difference (CFD), to provide long-term revenue stability for generators2.

Contracts for Difference (CFD)

CFDs support 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'3.

At times when the electricity market price4 exceeds the strike price, the generator is required to pay back the
difference, thus protecting consumers from over-payment.
1
The CM will ensure generators (power stations etc.) deliver electricity to the grid when required. The Government,
advised by the National Grid, identifies total capacity requirements four years in advance (starting 2018/19) and then
runs a capacity auction every 12 months with generators bidding in at the lowest price at which they would provide their
capacity. Auction costs for capacity are capped protect consumers from excessive costs. All generators / capacity
providers are eligible to participate in the CM and auction, if not already in receipt of other forms of support payment.
The cost of the capacity payments to successful generators is shared by suppliers (under the Supplier Obligation), who will
in turn recover this cost from all electricity consumers, through bills.
2
Generators compete for CFDs through a sealed bid, uniform price auction. Bids are accepted sequentially, from lowest
to highest cost, up to the budget limit. When the auction is closed, all projects within that delivery year are awarded a
final clearing price equal to the strike price of the last approved project - the ‘Clearing Strike Price’. The Clearing Strike
Price is capped at the relevant Administrative Strike Price set for each technology. See:
http://www.euenergycentre.org/press-releases-and-news/284-major-changes-for-the-renewable-electricity-market-a-
focus-on-uk-contracts-for-difference-cfd
3
‘Strike price’ – CFD contracts will state a strike price, which is the ‘Clearing Strike Price’. A generator with a CFD
agreement will earn revenue from the normal commercial sales of its electricity via a PPA; if the reference market rate is
lower than the CFD strike price, the generator will also receive a top-up payment for the difference under the CFD
agreement; if the reference market rate is above the strike price, the generator must pay back the difference.

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The principle is illustrated in the figure below:

Figure 2 CFD principles illustrated (DECC)

I.e. CFDs give greater certainty and stability of revenues to electricity generators by reducing their exposure to
volatility in wholesale prices, whilst protecting consumers from paying for higher support costs when
electricity prices are high.

Institutional framework
CFDs are implemented through a bilateral contract between a low carbon electricity generator and the Low
Carbon Contracts Company Ltd (LCCC) – the ‘CFD Counterparty’, which is a Government-owned company. The
CFD payments to be made to generators will be calculated and paid out by the LCCC. The cost of CFDs will be
met by consumers via the supplier obligation, a levy on electricity suppliers.

National Grid is the Delivery Body for CFDs (and EMR) and this role includes the qualification of applicants and
the allocation of Contracts for Difference (CFD) in accordance with the CFD legislative framework and
Department of Energy and Climate Change (DECC) documents that are specific to each Allocation Round.

Relationship to Power Purchase Agreement (PPA)

The CFD contract and PPA contract are completely separate, with the CFD contract being between the
generator and LCCC, and the PPA agreement between the generator and a separate PPA provider5.

4
‘Market reference price’– a measure of the average market price for electricity in the GB market.
5
DECC has published guidance for CFD compatible PPAs, which is voluntary, and has legislated for ‘backstop PPAs’ with a
licensed supplier in case a PPA is not available to a generator through normal commercial avenues. There is a 25%
administration charge for this ‘backstop PPA’ likely to make it uncompetitive. See:
https://www.gov.uk/government/consultations/implementing-the-offtaker-of-last-resort

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The PPA may be for a term between 1 year and 15 years and will provide payment for the energy generated in
line with the agreed pricing structure in that contract. This pricing structure may not follow the same profile as
the calculated “market rate” methodology within the CFD contract.

Some PPA agreements may follow the CFD calculation methodology in future, to provide generators clarity on
income, but this is not guaranteed. It is possible that administration costs on the PPA contract may also be
applicable and the net income to the Generator be reduced slightly from the calculated value.

This could mean that the income to the Generator is not the strike price.

Strike Price = LCCC Calculated “market price” + CFD top-up

Generator Income = PPA (net) + CFD top-up

Market testing, following the first found of CFD allocations, should provide more clarity on the impact of the
relationship between PPA and CFD.

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Eligible technologies and technology groupings in Round 1
CFDs will be available to a wide range of low-carbon technologies supporting investment and encouraging
competition as the UK makes the transition to a low-carbon generation mix.

The first allocation round (Round 1) in 2014/15 broke the overall budget down by technology group (‘pot’) and
delivery year. The projects that won the auction will receive 15 year contracts.

Technology
Technology Comment
Group

Round 1 resulted in total capacity of 748.55 MW

Energy from Waste (with CHP); for onshore wind, 71.55 MW for solar PV, and
Pot 1 Hydro (>5MW and <50MW); 94.75 for Energy from Waste with CHP. Clearing
strike prices were below the administrative strike
(established Landfill Gas; Sewage Gas; 7
price .
technologies) Onshore Wind (>5MW)6;
Solar PV (>5MW). Onshore wind had to have a capacity of > 5MWe to
be eligible for CFD.

Tidal Stream (0-30MW);

Wave (0-30MW);
Offshore Wind;
Pot 2 (less Geothermal (with or without CHP);
Round 1 resulted in total capacity of 1,162 MW for
established Advanced Conversion Technologies (ACT) offshore wind, and 62 MW for ACT.
technologies) (with or without CHP)8;
Anaerobic Digestion (with or without CHP,
>5MW);
Dedicated Biomass (with CHP)

Pot 3 Biomass Conversion No budget allocated in Round 1

As noted above, to be eligible under CFD Round 1, onshore wind schemes had to have a capacity of
greater than 5MW. I.e. CFD and the Feed in Tariff Scheme (FiTS) are mutually exclusive – FiTS apply up to
5MWe installed capacity whereas CFD is only onshore for schemes > 5MWe.

This threshold did not apply under Round 1 to some other technologies listed above e.g. wave and tidal.

Source: DECC (2015)9

6
The Administrative Strike Price (ASP) for onshore wind in Round 1 was set at £95/MWh in delivery years 2015/16 and
2016/17, dropping to £90/MWh in delivery years 2017/18 and 2018/19.
7
Onshore wind projects in Round 1 bid and accepted CFDs with a Clearing Strike Price (CSP) lower than the ASP – the CSP
for onshore wind was between £79.23 and £82.50, depending on delivery year. (The strike price awarded through CFD is
the lower of the CSP or ASP, i.e. the ASP is the maximum strike price that can apply in a successful auction.)
8
Generation of electricity from fuel from gasification and pyrolysis of biomass or waste.

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Allocation Round 2 and Scottish island onshore wind

Allocation Round 2
The allocation framework for Round 2 has not yet been released but is expected in 2015/16.

In July 2015 DECC postponed the next CFD auction for large renewables projects and will instead make an
announcement on timing of ‘Round 2’ in the autumn of 2015.

Scottish island onshore wind

Prior to Round 1 a separate administrative strike price10 was published for wind farms deployed on Scottish
islands (under Technology Group 2); however, this technology is still subject to State Aid approval in the CFD
framework, so did not appear as a separate form of renewable generation in the first allocation round.

During Round 1 auctions, Scottish island onshore wind projects were eligible to apply for a CFD as an onshore
wind projects, providing they met the minimum capacity requirements (>5MW).

9
CFD Auction Allocation Round One - a breakdown of the outcome by technology, year and clearing price. See:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/407465/Breakdown_information_on_C
FD_auctions.pdf
10
DECC 2013 ‘Consultation on additional support for island renewables’. Consultation proposed an administrative strike
price of £115/MWh, from 2017/18 onwards, compared to £95 for onshore wind > 5MW (2012 prices) received in Round
1. See:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/245381/scottish_islands_additional_su
pport_consultation.pdf

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Further Information

Background to the CFD

Implementing EMR handbook, Chapter 2. See:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/324176/Implementing_Elect
ricity_Market_Reform.pdf

CFD User Guide. See:

https://www.emrdeliverybody.com/Contracts%20for%20Difference%20Document%20Library/CFD%20User%2
0Guide.pdf#search=user%20guide

Guidance on CFD standard terms and conditions. See:

https://www.gov.uk/government/publications/contracts-for-difference-standard-terms-and-conditions

Legislation - Five statutory instruments implementing CFDs

The Contracts for Difference (Allocation) Regulations 2014. See:
http://www.legislation.gov.uk/id/ukdsi/2014/9780111116777

The Contracts for Difference (Definition of Eligible Generator) Regulations 2014. These regulations define an
eligible generator for the purposes of entering into a CFD. See:
http://www.legislation.gov.uk/id/ukdsi/2014/9780111116807

The Contracts for Difference (Standard Terms) Regulations 2014. See:

http://www.legislation.gov.uk/id/ukdsi/2014/9780111116838

The Contracts for Difference (Electricity Supplier Obligations) Regulations 2014:

http://www.legislation.gov.uk/ukdsi/2014/9780111116784/

The Electricity Market Reform (General) Regulations 2014

http://www.legislation.gov.uk/id/ukdsi/2014/9780111116791

Institutional framework
National Grid – National Grid Electricity Transmission plc (NGET) is the Delivery Body for EMR and Contracts for
Difference, responsible for publishing CFD application/allocation guidelines and running the CFD allocation
process. See: https://www.emrdeliverybody.com/SitePages/Home.aspx

Low Carbon Contracts Company (the CFD Counterparty) – will manage the Contracts for Difference (CFD)
introduced as part of the EMR programme. See: https://www.lowcarboncontracts.uk

National Grid CFD helpline

CFD queries: National Grid: Phone: 01926 655300; Email: emr@nationalgrid.com

Commissioned by the Scottish Government and Energy

Saving Trust.

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This document was last updated August 2015