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Contracts for Difference
Disclaimer: this information is accurate as of July 2015. The timing of Round 2 will be announced in autumn 2015, and the allocation framework for Round 2 will be released subsequent to this announcement.
Contracts for Difference (CFD) support new investment in low-carbon electricity generation and provide long-term revenue stability for generators, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers overall. By providing a guaranteed minimum price for electricity, investors have greater certainty in their return on investment, so are potentially more likely to invest.
CFDs require generators to sell electricity into the market as usual, through a Power Purchase Agreement (PPA) with a supplier, but reduce exposure to variations in electricity prices by providing a variable top-up from the market price to a pre-agreed 'strike price'.
At times when the electricity market price exceeds the strike price, the generator is required to pay back the difference, thus protecting consumers from over-payment.
Want to keep reading about Contracts for Difference? Download the Briefing Paper HERE.