Contract for Difference

A Contract for Difference (CfD) is a private law contract between a low carbon electricity generator and the Low Carbon Contracts Company (LCCC), and the Contracts for Difference (CfD) scheme built around these contracts is the government's main mechanism for supporting low carbon electricity generation in Great Britain. Developers are paid a flat indexed rate for the electricity they produce over a 15-year period, representing the difference between a 'strike price' reflecting the cost of the technology and a 'reference price' tracking average wholesale electricity prices — generators pay back the difference to consumers when the reference price exceeds the strike price, and receive a top-up payment when it falls below.

The scheme is administered through competitive allocation rounds, or auctions, in which eligible renewable and low carbon generators submit sealed bids and compete directly against other technologies for a contract; there have been several rounds to date, held annually from Allocation Round 5 onward. The LCCC is counterparty to the contracts awarded in CfD allocation rounds (auctions), issuing and managing the contracts and making the CfD payments, while National Grid ESO runs the allocation process itself and Ofgem hears certain appeals. This differs from the underlying legal instrument (the individual Contract for Difference) in that it describes the full administrative scheme — eligibility, bidding, contract award and ongoing payment administration — rather than only the bilateral contract mechanics.