What is a CFD?
CFDs are awarded under the Contracts for Difference regime which is a mechanism introduced as part of the UK Government’s Electricity Market Reform programme to promote investment in secure and low carbon electricity generation while improving affordability for consumers. CFDs are private law contracts between a generator and LCCC which are in a standard template form published by the Department for Business, Energy & Industrial Strategy. The template CFD is divided into two parts, being the front end agreement (the “CFD Agreement”) into which the variables are inserted (e.g. generators name, project description, strike price) and the template standard terms and conditions. The essence of a CFD is that the generator will be paid the difference between the ‘strike price’ and the ‘reference price’. The strike price is a price for electricity reflecting the cost of investing in a particular low carbon technology. The reference price is the average market price for electricity at the relevant point in time. If the generator sells its electricity at less than the strike price, LCCC will pay it the difference. If the generator sells its electricity for more than the strike price, the generator will pay LCCC the difference.