Electricity Market Reform: Contracts for Difference (2024)

FAQs

What is the contract for difference in electricity market? ›

What are contracts for difference (CfDs)? Two-way contracts for difference (CfDs) is an agreement wherein the buyer, usually a public counterparty, pays the agreed-upon 'strike' price to the seller, often a renewable or low-carbon plant operator, for the contracted volume.

The reform package included the electricity market design regulation together with a proposal for a regulation to protect against market manipulation in the wholesale energy market, which was formally adopted by the Council on 18 March 2024.

Definition. In the energy world, contract for difference is a subsidy model in which both positive and negative deviations from a fixed reference price are paid out to the contractual partner. This means that a minimum compensation is guaranteed, but revenues are capped.

CfD is a long-term contract between an electricity generator and Low Carbon Contracts Company (LCCC). The contract enables the generator to stabilise its revenues at a pre-agreed level (the Strike Price) for the duration of the contract. Under the CfD, payments can flow from LCCC to the generator, and vice versa.

Does a CFD expire? CFD positions do not have an expiry date on most markets, so can be held open for as long as you choose to maintain your position. The main CFD markets that have an expiry date are futures and forwards, and options.

Wholesale electricity markets include the sale and purchase of electricity between suppliers and generators. Retail electricity markets involve suppliers selling electricity direct to consumers. The balancing mechanism market refers to how the ESO balances real-time supply and demand through the Balancing Mechanism.

Between 2010 and 2016, subsidies for solar were between 10¢ and 88¢ per kWh and subsidies for wind were between 1.3¢ and 5.7¢ per kWh. Subsidies for coal, natural gas and nuclear are all between 0.05¢ and 0.2¢ per kWh over all years.

Transmission costs and volatile fuel prices are the primary drivers of higher power bills, according to Tyson Slocum, director of Public Citizen's Energy Program.

A contract for differences (CFD) is a contract between a buyer and a seller that stipulates that the buyer must pay the seller the difference between the current value of an asset and its value at contract time.

What is a virtual power purchase agreement? A Virtual PPA (VPPA), often referred to as a 'contract for differences' is a financial contract where the buyer does not physically receive electricity from the contracted solar project.

What is the strike price of a CFD? ›

The strike price is set at the level at which the NPV of the project's lifetime costs and revenues is equal to zero. The strike price therefore represents the level of total revenue under the CfD required for the relevant project to achieve a rate of return equal to the BEIS latest view on central hurdle rates.

A Contract for Difference (CfD) is a long term (typically 15 year) contractual agreement between a low carbon electricity generator and the Low Carbon Contracts Company, known as the LCCC. The LCCC is government owned – and under the CfD agreement, the generator's income per unit of electricity is fixed.

In electricity markets, contracts for differences conventionally refer to long-term contracts between an electricity generator and a government; this is also how the European Commission uses the term in its recent legislative proposal.

Disadvantages of the use of CFD

Some of the main disadvantages of the use of Computational Fluid Dynamics (CFD) are: Complexity. CFD simulations can be complex to set up and run, requiring specialized software and expertise in fluid dynamics and numerical methods. Computational resources.

A contract for differences (CFD) is an agreement between an investor and a CFD broker to exchange the difference in the value of a financial product (securities or derivatives) between the time the contract opens and closes. It is an advanced trading strategy that is utilized by experienced traders only.

AEP Contracts means all construction contracts and/or other contracts in relation to the carrying out of the Asset Enhancement Program proposed to be entered into by, or on behalf of, the Lessors and the relevant contractors and/or project consultants and/or other professional advisers whose services are from time to ...

A contract for difference (CFD) is similar to a total rate of return swap except that payment only occurs once on the contract expiration date. A CFD may have a single stock, a basket of stocks, or an index as its underlying reference asset.