Business Energy Glossary
What is a Contract for Difference (CfD)?
Contracts for Difference, almost always shortened to CfD, is the main UK government scheme supporting new low-carbon electricity generation. Generators bid in competitive auctions for fixed-price contracts that guarantee a strike price for their output for a defined period (typically 15 years). If wholesale prices are below the strike price, consumers top up the generator. If wholesale prices are above the strike price, the generator pays back to consumers. CfD replaced the Renewables Obligation as the primary support mechanism for large-scale renewable generation in 2014.
CfD costs are a major component of UK electricity bills, accounting for around 3 to 8 per cent of the unit rate. The scheme has supported the build-out of UK offshore wind, solar, biomass, and other low-carbon generation since its launch. Understanding CfD helps explain bill movements and the structure of the UK electricity market.
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The CfD mechanism
Contracts for Difference (CfD) is the government’s main scheme for supporting new low-carbon generation, guaranteeing generators a fixed strike price for their output. The cost, or credit, is recovered through a levy on suppliers that’s passed into business electricity bills.
For the full explanation, see How business electricity prices are calculated.
The CfD provides a financial guarantee to generators that does not depend on the wholesale market price they receive:
- Generator wins a CfD contract at a defined strike price (£/MWh).
- Generator sells electricity in the wholesale market at the prevailing reference price.
- If reference price < strike price: the Low Carbon Contracts Company (LCCC, government counterparty) pays the difference to the generator.
- If reference price > strike price: the generator pays the difference to the LCCC.
- LCCC payments are funded by a supplier levy passed through to consumers.
The mechanism gives generators revenue certainty for 15 years while exposing them to operational and technology risks.
CfD allocation rounds
CfDs are allocated through periodic competitive auctions. The history:
| Allocation Round | Year | Notes |
|---|---|---|
| AR1 | 2015 | First CfD auction |
| AR2 | 2017 | Offshore wind below £60/MWh |
| AR3 | 2019 | Offshore wind below £40/MWh |
| AR4 | 2022 | Largest auction; multiple technologies |
| AR5 | 2023 | No offshore wind bids, as the administrative strike price was set too low |
| AR6 | 2024 | Reset offshore wind, broader range of technologies |
From AR6, auctions are scheduled annually. Each round allocates a target capacity to specified technology pots.
Strike prices and reference prices
Strike prices vary by technology and over time:
- Offshore wind. Recent prices £40 to £75 per MWh (in 2024 money).
- Solar PV. Recent prices £40 to £55 per MWh.
- Onshore wind. Recent prices £45 to £60 per MWh.
- Tidal stream and emerging technologies. Higher strike prices to support technology development.
The reference price against which payments are calculated is typically the day-ahead market price for the relevant settlement period, adjusted for technology-specific reference price profiles.
Cost on UK bills
CfD costs are recovered through a supplier levy that suppliers pass through to consumers. Typical figures:
- Around 0.5 to 1.5 p/kWh on UK business electricity bills depending on wholesale prices.
- 3 to 8 per cent of a typical business unit rate.
- Net CfD payments can flow in either direction: when wholesale prices are high, CfD generators pay back to consumers; when wholesale prices are low, consumers pay top-up.
During the 2021-22 wholesale price spike, CfD generators paid substantial sums back to consumers, partially offsetting the impact of high wholesale prices.
CfD-supported technologies
Different CfD pots support different technology categories:
- Pot 1: Established technologies. Onshore wind, solar PV (after exclusion was lifted in 2020).
- Pot 2: Less established technologies. Offshore wind (until recently), tidal stream, geothermal.
- Pot 3: Floating offshore wind. Specific support for floating offshore in deeper waters.
The pot structure has evolved over allocation rounds to support specific government technology priorities.
CfD vs Renewables Obligation
| Feature | CfD | RO |
|---|---|---|
| Period of operation | 2014 onwards | Closed to new generation 2017; runs to 2037 for existing generators |
| Allocation mechanism | Competitive auction | Banded ROC allocation |
| Revenue certainty for generator | Full (strike price guaranteed) | Partial (ROC value variable) |
| Consumer cost | Variable (depending on wholesale prices) | Largely fixed |
| Best suited to | Large-scale projects with predictable output | Existing fleet support |
a Contract for Difference (CfD) FAQs
What is a Contract for Difference (CfD)?
A UK government scheme that gives low-carbon electricity generators a fixed-price contract for their output. Consumers top up generators when wholesale prices are below the strike price; generators pay back when wholesale prices are above.
How does CfD affect my bill?
CfD costs are recovered through a supplier levy that adds 0.5 to 1.5 p/kWh to UK business electricity bills. The amount varies with wholesale prices: when wholesale prices are high, CfD generators pay back to consumers; when low, consumers pay top-up.
What is a strike price?
The fixed price agreed between a CfD generator and the LCCC for the duration of the contract (typically 15 years). The generator receives the strike price regardless of the wholesale market price.
How are CfDs allocated?
Through competitive auctions called Allocation Rounds, held periodically and now annually. Generators bid for CfD contracts at competitive strike prices. The lowest bids win until the target capacity is allocated.
What technologies receive CfDs?
Offshore wind, onshore wind, solar PV, biomass with CCS, tidal stream, geothermal, and emerging technologies. The pots and eligibility have evolved over allocation rounds.
When did CfD start?
2014, as part of the Electricity Market Reform package. First contracts were awarded in 2015 in AR1. CfD has been the primary support mechanism for new UK low-carbon generation since.
Is CfD better than the Renewables Obligation?
CfD provides stronger revenue certainty for generators (fixed strike price for 15 years) than RO (variable ROC value). For consumers, CfD costs are more variable but can also produce credits when wholesale prices are high.
Who pays for CfD?
Electricity consumers. Suppliers pay a CfD levy to the LCCC based on their share of UK electricity supply. The cost is recovered through unit rates and standing charges.