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Contracts for Difference for renewable energy

The Contracts for Difference (CfD) scheme is a government subsidy encouraging investment in renewable energy in Britain.

It ensures large-scale renewable projects, such as offshore wind farms, receive a guaranteed electricity price, providing financial stability before construction starts.

Since 2014, the CfD scheme has offered financial stability at competitive prices for renewable energy, driving a substantial increase in the number of UK wind farms.

The CfD scheme remains at the core of the government’s strategy to decarbonise the national grid. Here are the key sections of our guide to renewable energy CfDs:

How contracts for difference work
Contracts for Difference strike prices explained
The CfD auction process
How CfDs affect electricity prices

How contracts for difference work

In a CfD agreement, the government guarantees the price per MWh of electricity generated for the first 15 years of a new renewable energy generator once it is built.

Under the CfD scheme, the government does not purchase any electricity. Instead, it pays the difference between the amount the generator receives from the wholesale market and the guaranteed price.

The two key figures in calculating what the government pays in a CfD contract are:

Strike price: The government-guaranteed price per MWh.
Market price: The wholesale market price for renewable electricity.

The best way to illustrate this is through the following two examples of different market scenarios.

CfD mechanism in normal market conditions

The guaranteed price is typically higher than the current market price because the CfD scheme supports renewable energy development by ensuring a favourable price.

The government pays the renewable energy developer weekly to top up the additional price per MWh. Here’s an example:

Strike price: £70/MWh
Market price: £50/MWh
Government top-up: £20/MWh

CfD mechanism with high market prices

In rare circumstances, the price guaranteed by the government is lower than the market price. This occurred in 2022 during the energy crisis.

In such cases, the government receives a weekly payment from the renewable energy developer to adjust the price they receive down to the guaranteed strike price:

Strike price: £70/MWh
Market price: £85/MWh
Developer owes: £15/MWh

Contracts for Difference strike prices explained

The strike price in a Contract for Difference is the price the government guarantees for a renewable energy developer.

The strike price is determined through a competitive auction process, where developers bid for CfD contracts by offering the lowest price at which they are willing to supply electricity.

The government awards CfD contracts only to developers offering the most competitive (i.e. lowest) strike prices.

The table below shows the awarded strike prices for different types of renewables from the most recent CfD auctions.

CfD Auction	Date	Offshore Wind	Onshore Wind	Solar
Allocation Round 1	October 2014	£114/MWh	£80/MWh	£50/MWh
Allocation Round 2	April 2017	£57/MWh	N/A	N/A
Allocation Round 3	May 2019	£41/MWh	N/A	N/A
Allocation Round 4	September 2021	£37/MWh	£42/MWh	£46/MWh
Allocation Round 5	March 2023	N/A	£52/MWh	£37/MWh
Allocation Round 6	September 2024	£59/MWh	£51/MWh	£50/MWh

Note: The figures in the table show the 2012 pre-inflation equivalent to allow direct comparison between strike prices.

Since the start of the CfD scheme, strike prices have decreased as renewable energy technology has advanced, reducing costs for developers. However, strike prices in AR6 rose due to increasing costs in global supply chains for materials and equipment.

The CfD auction process

The allocation of CfD contracts is conducted through a competitive bidding process, awarding these long-term agreements at the lowest price to the government.

Here’s a step-by-step overview of the auction process:

Pre-auction rules and applications

The UK government determines the total available budget and capacity cap (in MW) for each auction, which is allocated across different types of renewable energy technologies.

The government also sets an Administrative Strike Price (ASP) for each category, which acts as the maximum strike price the auction will accept for each type of renewable energy technology.

Renewable energy developers apply to participate in the auction, submitting a minimum required strike price and the expected capacity for their projects.

Sealed bid auction

CfD auctions follow a sealed bid process, where the minimum strike price submitted by each developer is kept private until the auction closes.

Once bidding ends, the government ranks all bids from lowest to highest strike price for each type of renewable technology.

CfD contracts are awarded starting from the lowest bid and moving upwards until either the budget is fully utilised or the Administrative Strike Price (ASP) is reached.

💡 In Allocation Round 5 (AR5) in 2023, no offshore wind farm bids were submitted below the Administrative Strike Price. As a result, no CfD contracts were awarded in that category for that year.

Calculating the strike price

The CfD strike price awarded in the auction is set by the last successful bid for each technology type.

All winning bids within the same technology pot receive the same strike price, even if they originally bid at lower prices.

The Low Carbon Contracts Company (LCCC), a government-owned entity, signs CfD contracts with all successful bidders.

How CfDs affect electricity prices

The Contracts for Difference (CfD) scheme has two key impacts on domestic and business electricity prices per kWh.

The first is a short-term additional cost to energy bills to fund the scheme, which is expected to lead to future reductions in the price of electricity in Britain.

In this section, we’ll explain both impacts.

CfD supplier obligation levy

Under normal market conditions, the CfD is a subsidy for renewable energy generators, topping up the price they receive for their electricity. This subsidy is funded through domestic and business electricity bills and has been estimated to have added 2.9% to bills since the scheme began.

The Low Carbon Contracts Company (LCCC) is responsible for making CfD payments from each auction round.

The LCCC receives its funding through the CfD Supplier Obligation Levy, collected from licensed energy suppliers.

Up to August 2024, the CfD scheme has levied £8.9 billion from licensed domestic and business energy suppliers. These suppliers pass on this cost to their customers through higher domestic and business electricity standing charges.

Reducing exposure to natural gas prices

Approximately 27% of electricity on the British national grid is generated using gas-fired power stations. These power plants require vast amounts of natural gas (a fossil fuel imported from abroad) to produce electricity.

Reliance on gas-fired power stations means that external geopolitical events, such as the conflict in Ukraine, directly influence electricity prices in Britain.

In contrast, UK wind farms and solar generators effectively produce free electricity as long as the sun shines and the wind blows.

The CfD scheme has driven the expansion of renewable energy generation, reducing Britain’s reliance on expensive and volatile international fossil fuel markets.

As renewable energy capacity continues to grow, it is expected to contribute to future reductions in electricity costs for the UK.

How to participate in CfD auctions

The first step in participating in a CfD auction is to assess whether your proposed renewable energy generator meets the technology and other eligibility criteria.

A pre-auction application is required to confirm eligibility and provide evidence of compliance with the criteria.

A CfD auction bid must include the following details:

Strike price bid: The proposed minimum strike price (£/MWh) for the project.
Capacity: The capacity of the renewable project, measured in megawatts (MW).
Delivery year: The expected completion date of the renewable project.

The website cfdallocationround.uk provides a comprehensive set of resources for applicants in each CfD round.

What technologies are eligible for CfDs?

The following technologies were eligible for the most recent CfD auction round.

Technologies are categorised into three pots based on how established they are within the renewable energy sector. Less-established technologies are assigned a higher maximum allowed strike price to reflect higher development costs.

Pot 1. Established technologies

Onshore Wind (capacity >5 MW)
Solar Photovoltaic (PV) (capacity >5 MW)
Energy from Waste with CHP (Combined Heat and Power)
Hydro (water turbines >5 MW and <50 MW)
Landfill Gas Sewage Gas
Remote Island Wind (onshore wind >5 MW located on remote islands)

Pot 2. Less-established technologies

Advanced Conversion Technologies (e.g. gasification/pyrolysis of waste)
Anaerobic Digestion (>5 MW)
Dedicated Biomass with CHP
Floating Offshore Wind (wind turbines on floating platforms)
Geothermal (electricity generation from geothermal heat)
Tidal Stream (marine turbines using tidal currents)
Wave (wave energy converters)

Pot 3. Offshore wind

Pot 3 is a dedicated category exclusively for offshore wind projects (fixed-bottom offshore wind farms).

Since Allocation Round 6 (AR6), offshore wind has been assigned its own category to prevent it from dominating other categories in the auction process.

Other CfD eligibility requirements

Here are the additional requirements for participating in a CfD auction:

Location: Projects must be in Great Britain (England, Scotland, or Wales).
Capacity threshold: Eligible projects typically require a capacity of 5 megawatts (MW) or greater.
Planning consent: Applicants must obtain all necessary planning permissions and consents before applying.
Grid connection agreements: Projects must have agreements for electricity grid connection to ensure they can deliver electricity to the network.
Metering: Electricity exported from the project must be measured separately using half-hourly electricity metering equipment.

💡 Smaller generators, such as commercial solar panels owners, can secure future electricity prices by selling solar electricity using a corporate PPA.

Organisations involved in the CfD scheme

If you are considering participating in a CfD auction, it is important to understand the role of the following organisations responsible for delivering the CfD scheme:

Department for Energy Security and Net Zero – This government department sets the rules, timing, budget, and Administrative Strike Price for each auction.
National Energy System Operator (NESO) – Oversees the auction process, including registrations and the review of pre-auction applications.
Low Carbon Contracts Company (LCCC) – Acts as the counterparty for all CfD contracts.
Ofgem – The energy regulator Ofgem handles appeals and disputes related to the CfD scheme.

The most recent CfD auction

The most recent CfD auction, Allocation Round 6 (AR6), concluded in September 2024.

This round marked a significant milestone in the transition to a clean energy grid, with the highest-ever budget of £1.6 billion.

Here are the key results from AR6:

Increase in Capacity Awarded – AR6 awarded 9.6 GW in capacity across 131 projects, a significant increase compared to AR5, which awarded 3.7 GW.
Offshore Wind Expansion – After AR5 saw no offshore wind bids below the government’s maximum strike price, AR6 marked a return to normality, with nearly 5 GW of capacity awarded to offshore wind farms, including the Hornsea Four project.
Diverse Technology Support – AR6 allocated a substantial portion of its budget to emerging technologies, with a significant share awarded to floating offshore wind projects.

Market distortions and competition issues

In Britain, the energy markets are largely deregulated, allowing energy generators and suppliers to compete in an open market.

The Contracts for Difference (CfD) scheme is a market intervention by the UK government designed to support the expansion of renewable energy.

However, as with any intervention in a free market, the CfD scheme introduces market distortions and competition issues. CfD holders are insulated from market fluctuations, as they always receive their fixed strike price, which can lead to adverse incentives.

For example, CfD holders can bid to sell their power on the wholesale market at very low prices, knowing that the government will always top up their earnings to meet the agreed strike price.

This becomes particularly problematic on windy days, when wind farms operate at full capacity, driving wholesale electricity prices to zero or even negative values. This has several distorting impacts:

Reducing the profitability of non-subsidised energy generators.
Disincentivising private investment in non-subsidised projects.
Accelerating the early retirement of gas power plants, reducing energy security.

Looking into the future for CfDs

The Contracts for Difference (CfD) scheme has been hugely successful in encouraging the development of renewable energy in Britain. It remains central to the UK’s goal of achieving a zero-carbon electricity grid by 2030.

The next CfD auction will open for applications in summer 2025, with further rounds expected to occur annually thereafter. Let’s explore some potential developments for future CfD rounds.

Non-price factors

The government is seeking to amend the CfD auction process to introduce non-price factors.

The first example of an introduced non-price factor is the Clean Industry Bonus (CIB). To participate in Allocation Round 7 (AR7), offshore wind farm developers must either:

Invest in local supply chains to stimulate economic growth in the UK, or
Commit to measurable emissions reductions in their construction.

Proposed CfD reforms

Several CfD reforms are being evaluated by the Department for Energy Security and Net Zero to mitigate the market distortions and competition issues.

Here are the three most prominent proposals:

Cap and Floor Model – Instead of providing a fixed strike price, this CfD model would guarantee a minimum floor price and a maximum cap.
Partial CfD – CfDs would be provided for only a fixed portion of renewable output, reintroducing partial market exposure.
Capacity-Based CfD – Generators would receive payments based on installed capacity rather than electricity output, reducing the incentive to generate during periods of negative electricity prices.

Nuclear CfDs

In the past, the UK government used CfDs to support the development of the Hinkley C Nuclear Power Station.

Nuclear power is a low-carbon energy source that faces the same long-term investment challenges of renewable energy.

However, future nuclear power plants, particularly Sizewell C, will not use the CfD model. Instead, they will operate under the Regulated Asset Base (RAB) model, which allows the developer, EDF Business Energy, to recover costs during construction.

Other green CfDs incentives

Following the success of renewable energy CfDs, the mechanism is now being used to promote the development of other green technologies.

Here are two recent examples being implemented in the UK:

Carbon Contracts for Difference (CCfD) – Designed to incentivise carbon capture technology by providing a secure strike price for carbon extracted from the atmosphere.
Hydrogen Contracts for Difference (HCfD) – Used to encourage the low-carbon production of hydrogen by offering a guaranteed strike price per kilogram of hydrogen produced.