Contracts for Difference (CFD) Scheme

1. Introduction to the Policy

The Contracts for Difference (CFD) scheme is the UK Government’s primary mechanism for supporting investment in new low-carbon electricity generation. First introduced in 2014 under the Energy Act 2013, it replaced the previous Renewables Obligation (RO) system and has become one of the most copied renewable energy policy models in the world.

Unlike the ZEV Mandate, which is a regulatory instrument, the CFD is a market-based financial mechanism. It reduces investment risk for renewable energy developers, enabling them to secure financing for large projects (wind farms, solar parks, tidal etc.) that might otherwise be too commercially uncertain to build.

2. How the CFD Mechanism Works

The CFD works as a two-way price guarantee between a renewable energy developer and the Government (via the Low Carbon Contracts Company, a government-owned company):

  1. Strike Price: The government sets a guaranteed price per megawatt-hour (MWh) of electricity the developer will receive — agreed at auction.

  2. Reference Price: The actual market price of electricity at any given time.

  3. The Difference:

    • If the market price falls below the strike price → the government pays the developer the difference. This protects the developer from low prices.
    • If the market price rises above the strike price → the developer pays the government the difference. This protects consumers from overpaying.

This two-way mechanism is what makes it a “contract for difference” — it stabilises revenue around the agreed strike price regardless of market volatility.

3. The Auction Process

CFD contracts are awarded through competitive auctions (called “allocation rounds”), which have been run periodically since 2015:

Round Year Key Technologies Supported
AR1 2015 Offshore wind, onshore wind, solar
AR2 2017 Offshore wind, solar
AR3 2019 Offshore wind, remote island wind
AR4 2022 Offshore wind, floating offshore wind, tidal
AR5 2023 Offshore wind, solar, tidal, geothermal
AR6 2024 Offshore wind, onshore wind, solar, tidal

Developers bid the lowest strike price at which they are willing to build. The government awards contracts to the cheapest projects first, up to a total capacity budget. This competitive pressure has been a key driver of falling renewable energy costs.

4. Why CFD Has Been Significant

Cost reduction: Offshore wind strike prices fell from around £150/MWh in AR1 (2015) to £37/MWh in AR3 (2019) — a reduction of over 75% in four years. This dramatic cost reduction is widely attributed to the CFD scheme providing the stable revenue certainty needed for manufacturers to invest in scaling up production of turbines and components.

Capacity growth: The cumulative capacity of projects awarded CFD contracts now represents a substantial share of UK electricity generation. By 2024, CFD-supported projects were generating approximately 30% of UK electricity.

Investor confidence: Because developers know exactly what revenue they will receive over a 15-year contract period, CFDs have unlocked large-scale private investment in UK renewables that would not otherwise have occurred.

5. Criticisms and Challenges

AR5 failure (2023): Allocation Round 5 was widely regarded as a significant policy failure. Due to rising inflation and supply chain costs, the government set the maximum bid price (the “administrative strike price”) too low. No offshore wind projects bid at all — the first time since the scheme began that offshore wind failed to attract any bids. The government had to rapidly revise prices upward for AR6.

Consumer costs during the energy crisis: When wholesale electricity prices surged following Russia’s invasion of Ukraine in 2022, CFD developers with strike prices well below market rates had to pay large sums back to the government. While this helped consumers, it also raised questions about future developer appetite for CFDs.

Grid connection delays: Even when CFD contracts are awarded, projects face lengthy grid connection queues — sometimes 10+ years. This means awarded capacity does not translate immediately into generating electricity.

Geographic concentration: CFD-supported capacity is heavily concentrated in offshore wind in the North Sea, with some regions of the UK seeing disproportionate benefits from the scheme.

6. Data Analysis

See the CFD Data Analysis page for charts based on LCCC and DESNZ auction data.

Sources: LCCC (2024), DESNZ (2024), NAO Report on CFD Scheme (2023)