Contracts for Difference (UK electricity market support)

Contracts for Difference (CfD) are the main market support mechanism for low carbon generation in the UK. The scheme replaced the Renewables Obligation which closed to new generation in March 2017. It is administered by the Low Carbon Contracts Company (LCCC), which is owned by the UK Government.

The scheme offers a fixed "Strike Price" to generators over a 15-year contract, which provides financial certainty, unlike the wholesale electricity market which can fluctuate significantly. With the contract for difference, if the market price for electricity drops below the Strike Price, LCCC pays the generator the shortfall, however if the market price rises, the generator must pay back the difference. The costs of the scheme are passed onto consumers via their electricity bills.

The contracts are awarded using a reverse auction in annual "Allocation Rounds" (AR) where companies submit sealed bids for a project capacity and cost. Contracts are awarded to the lowest cost projects first, until a predefined budget or capacity cap is reached. The budget is split into different 'Pots' which different technologies can bid into, although these have varied by auction.

Bids cannot be above a maximum "Administrative Strike Price" set before the auction. To make comparison between years easier, all Strike Prices are quoted in 2012 prices, but projects are paid an inflation-adjusted amount linked to the Consumer Price Index (CPI). The projects also set out a delivery year, when the projects is expected to be commissioned, however this may slip for various reasons.

History
In December 2010, the Government introduced plans to reform the electricity market. The Electricity Market Reform (EMR) introduced both a capacity market to incentivise reliable generation and Contracts for Difference to provide revenue certainty to developers investing in low carbon and renewable energy, but at a lower cost that the Renewables Obligation.

Prior to the first Allocation Round, there was a mechanism called Final Investment Decision Enabling for Renewables. This awarded CfDs to five offshore wind projects, two biomass conversion projects, and one dedicated biomass with combined heat and power, with a total capacity of almost 4.5 GW.

Separately, the Government also awarded a CfD to Hinkley Point C nuclear power station, set at £92.50/MWh for a 35 year period. This is 20 years longer than other CfD contracts. See §Cost to consumers of the Hinkley Point C article for further discussion on the costs.

Results of the first two auctions were announced in February 2015 and September 2017. Since AR3 in 2019, subsequent auctions have been on an annual basis,.

AR1
The first Allocation Round auction started in October 2014, with results announced on 19 February 2015. The maximum prices are given in the first table below. A total of 2.1 GW of contracts were awarded, primarily for two offshore wind projects, the 714 MW East Anglia 1 and the 448 MW Neart Na Gaoithe, plus 15 smaller onshore wind projects.

AR2
The second round ran from April to September 2017. As announced in the 2016 budget, no funding was allocated in Pot 1 for the more established technologies of onshore wind, solar PV, hydro, energy from waste with CHP, landfill gas, and sewage gas. Instead, a Pot 2 budget of £290m for less established technologies, of which offshore wind was expected to form the majority. Nearly 3.2 GW of contracts were awarded for three offshore wind farms: Triton Knoll (860 MW), Hornsea Project 2 (1386 MW), and Moray Offshore Windfarm (East) (950 MW). Several smaller projects for advanced conversion technologies and dedicated biomass with CHP were also funded.

AR3
The auction process for AR3 took place between May and September 2021. Of the £265m annual budget, £200m was for offshore wind, £24m for floating offshore wind, and £10m for onshore wind, with the remaining £31m for other less established technologies including (onshore) remote island wind. AR3 delivered record low prices for offshore wind, with contracts to deliver in 2023/24 came in at £39.650/MWh and those delivering in 2024/25 at £41.611/MWh.

AR4
The auction for AR4 took place between December 2021 and July 2022, and re-introduced Pot 1 for established technologies. Of the total £285m budget, a £20m ringfence was set aside for tidal stream projects in Pot 2, and for the first time four contracts totalling just over 40 MW were awarded CfDs, MeyGen, Magallanes Renovables, and two for Orbital Marine Power. The first contract for a floating offshore wind turbine was also awarded, to Hexicon AB for their 32 MW TwinHub project.

AR5
The auction for AR5 took place between March and September 2023. The available budget was £170 million for Pot 1 (established technologies) and £35 million for Pot 2 (emerging technologies) including a minimum £10m ringfence for tidal stream. Despite warnings from industry before the auction, there were no bids from offshore wind projects as the Administrative Strike Price was seen to be to low to cover the increases in supply chain and cost of capital.

AR6
The budget for AR6 was set at just over £1bn, split into three pots:

The Administrative Strike Prices were significantly increased from AR5.
 * Pot 1 for established technologies, £120m,
 * Pot 2 for emerging technologies, £105m, again including a £10m ringfence for tidal stream,
 * Pot 3 for offshore wind, £800m.