Financial contracts for differences: The problems with conventional CfDs in electricity markets and how forward contracts can help solve them

2024/01/13 by Ingmar Schlecht, Christoph Maurer, Lion Hirth · 1 voice · 5 citations
Business, Management and Accounting · Engineering · #Electric Power System Optimization #Public-Private Partnership Projects #Transport and Economic Policies

paper · doi:10.1016/j.enpol.2024.113981

openalex publication_date 2024/01/13 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/25

Abstract

Contracts for differences are widely seen as a cornerstone of Europe's future electricity market design. This paper is about designing such contracts. We identify the dispatch and investment distortions that conventional CfDs cause, the patches used to overcome these shortcomings, and the problems these fixes introduce. We then propose an alternative contract we call “financial” CfD. This hybrid between conventional CfDs and forward contracts mitigates revenue risk to a substantial degree while providing undistorted incentives. Like conventional CfDs, it is long-term and tailored to technology-specific (wind, solar, nuclear) generation patterns but, like forwards, decouples payments from actual generation. The proposed contract mitigates volume risk and avoids margin calls by accepting physical assets as collateral.

Cited by

• Most certainly certain? The Impact of Contract for Difference Design on Renewables' Strike Prices and Electricity Market Risks
• Assessing Long-Term Electricity Market Design for Ambitious Decarbonization Targets using Multi-Agent Reinforcement Learning
• Mechanism, Application, and Key Issues of Contract for Difference in Electricity Markets
• Designing a Policy Mechanism for Long-Duration Energy Storage: The British Experience
• Does the difference make a difference? Evaluating Contracts for Difference design in a fully decarbonised European electricity market

Discussions

• Fresh from the press: our proposal for a new long-term electricity contract, the “Financial Contract for Differences” Paper (open access): doi.org/10.1016/j.en... Presentation video: vimeo.com/90328 [bsky, 10 points, 0 comments]

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