Contracts for Difference (CfD) are the main market support mechanism for low carbon electricity generation in the UK.
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.
[1] 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.
[4] 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.
[5] Prior to the first Allocation Round, there was a mechanism called Final Investment Decision Enabling for Renewables.
[6][7] Separately, the Government also awarded a CfD to Hinkley Point C nuclear power station, set at £92.50/MWh for a 35 year period.
[9][10] The Clean Power 2030 Action Plan, published by DESNZ in December 2024, indicated further targeted reforms would be implemented before the AR7 auction, subject to further consultation.
This provides additional CfD support to offshore wind projects (both fixed and floating) that invest in more sustainable supply chains.
[25] The first contract for a floating offshore wind turbine was also awarded, to Hexicon AB for their 32 MW TwinHub project.
[28] 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.