Contracts for Difference

A CfD is a long term contractual agreement between a low carbon electricity generator and Low Carbon Contracts Company (LCCC), designed to provide the generator with price certainty over the lifetime of the contract. The contract is awarded through a competitive allocation process which determines the pre-agreed price (the “Strike Price”). As a private law contract, the CfD cannot be unilaterally changed once it has been signed.

The CfD generator then has a number of milestones to meet within the first few years of the contract in order to preserve the term for payments, which is typically 15 years. This includes proving commitment to the project within 12 months of contract signing, and commissioning 80% of the initial capacity estimate within the target commissioning window.

The CfD is designed to:

• Deliver the low-carbon electricity we need to meet the UK’s climate change targets at least cost to consumers.
• And do this by attracting new investment into low carbon generation, and at the lowest cost.

Electricity suppliers are required by regulation to fund the CfD payments made by LCCC to generators through the CfD Supplier Obligation Levy. We determine one quarter in advance of each quarter what amount will be needed in that quarter to make difference payments to generators, and set the Levy accordingly. LCCC is also required to collect a Reserve Amount from each electricity supplier, which is also based on assumed levels of electricity generation. We are able to reduce the levy and also the Total Reserve Amount prior or during a given quarter, if assumptions change due to events. We publish all of our quarterly assumptions in the Transparency Tool.