Contracts for Difference (CfD) are the main market support mechanism for low carbon generation in the UK. The scheme replaced the Renewables Obligation which closed to new generation in March 2017. It is administered by the Low Carbon Contracts Company (LCCC), which is owned by the UK Government.
The scheme offers a fixed "Strike Price" to generators over a 15-year contract, which provides financial certainty, unlike the wholesale electricity market which can fluctuate significantly. With the contract for difference, if the market price for electricity drops below the Strike Price, LCCC pays the generator the shortfall, however if the market price rises, the generator must pay back the difference. The costs of the scheme are passed onto consumers via their electricity bills.[1]
The contracts are awarded using a reverse auction in annual "Allocation Rounds" (AR) where companies submit sealed bids for a project capacity and cost. Contracts are awarded to the lowest cost projects first, until a predefined budget or capacity cap is reached. The budget is split into different 'Pots' which different technologies can bid into,[2] although these have varied by auction.
Bids cannot be above a maximum "Administrative Strike Price" set before the auction.[3] To make comparison between years easier, all Strike Prices are quoted in 2012 prices, but projects are paid an inflation-adjusted amount linked to the Consumer Price Index (CPI). The projects also set out a delivery year, when the projects is expected to be commissioned, however this may slip for various reasons.[1]