UK Contracts for Difference Policy for Renewable Electricity Generation

The UK's Contracts for Difference (CfD) policy, introduced in 2014, uses a competitive auction system to provide price certainty for large-scale renewable energy projects, primarily offshore wind. By guaranteeing a 'strike price' and utilizing a two-way payment mechanism, the policy reduces private-sector investment risk and lowers the cost of capital. While successful in driving down costs and increasing capacity—with the fourth allocation round adding nearly 11 gigawatts—the policy is noted as regressive due to its funding via a consumer levy. The author suggests Canada could adapt this model for mature technologies, carbon capture, and clean hydrogen, emphasizing the need for independent administration and robust market competition.

• The UK's CfD policy reduces investment risk by closing the gap between the wholesale market price and a fixed 'strike price' determined through competitive auctions, allowing developers to secure lower interest rates.
• The policy employs a two-way payment structure where generators receive payments when market prices are low but must pay back the Low Carbon Contracts Company when wholesale prices exceed the strike price, which prevents windfall profits and reduces costs for ratepayers.
• The competitive auction design has significantly lowered the public cost of renewable energy, with costs per kilowatt hour dropping by 65-75 per cent since the first auctions in 2015.
• The fourth allocation round, published in July 2022, confirmed 93 new projects and is expected to add nearly 11 gigawatts of capacity from offshore wind, onshore wind, solar, remote island wind, tidal stream, and floating offshore wind.
• The policy is considered regressive because it is funded by a statutory levy on electricity suppliers that is passed to consumers, meaning lower-income households pay a higher proportion of their income toward energy costs.
• To minimize political risk and ensure investor confidence, the CfD is administered as a private-law contract by the government-owned Low Carbon Contracts Company, operating at arm's length from the government.
• The author identifies several lessons for Canada, including the suitability of CfDs for mature technologies rather than early-stage innovations, and the potential application to carbon capture and storage and clean hydrogen production.

APA

Canadian Climate Institute (2023). UK Contracts for Difference Policy for Renewable Electricity Generation. https://climateinstitute.ca/publications/uk-contracts-for-difference-policy-for-renewable-electricity-generation/

Chicago

Canadian Climate Institute. UK Contracts for Difference Policy for Renewable Electricity Generation. 2023. https://climateinstitute.ca/publications/uk-contracts-for-difference-policy-for-renewable-electricity-generation/.

Wikipedia

{{cite report |author=Canadian Climate Institute |title=UK Contracts for Difference Policy for Renewable Electricity Generation |date=14 February 2023 |url=https://climateinstitute.ca/publications/uk-contracts-for-difference-policy-for-renewable-electricity-generation/ |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{canadianclimateinstitute2023contracts, author = {{Canadian Climate Institute}}, title = {{UK Contracts for Difference Policy for Renewable Electricity Generation}}, institution = {Canadian Climate Institute}, year = {2023}, month = feb, url = {https://climateinstitute.ca/publications/uk-contracts-for-difference-policy-for-renewable-electricity-generation/}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }