Contracts for Difference (CfD) are the main market support mechanism for low carbon electricity generation in the UK. The scheme replaced the

Renewables Obligation The Renewables Obligation (RO) is a market support mechanism designed to encourage generation of electricity from eligible renewable sources in the United Kingdom. There are three related schemes for the three legal jurisdictions of the UK. In ...

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 His Majesty's Government, abbreviated to HM Government or otherwise UK Government, is the central government, central executive authority of the United Kingdom of Great Britain and Northern Ireland.

. 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 In finance, a contract for difference (CFD) is a financial agreement between two parties, commonly referred to as the "buyer" and the "seller." The contract stipulates that the buyer will pay the seller the difference between the current value o ...

, 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, or benefits, of the scheme are passed onto consumers via their electricity bills. The contracts are awarded using a

reverse auction Reverse or reversing may refer to: Arts and media * ''Reverse'' (Eldritch album), 2001 * ''Reverse'' (2009 film), a Polish comedy-drama film * ''Reverse'' (2019 film), an Iranian crime-drama film * ''Reverse'' (Morandi album), 2005 * ''Reverse'' ...

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 A consumer price index (CPI) is a statistical estimate of the level of prices of goods and services bought for consumption purposes by households. It is calculated as the weighted average price of a market basket of Goods, consumer goods and ...

(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 Cogeneration or combined heat and power (CHP) is the use of a heat engine or power station to electricity generation, generate electricity and useful heat at the same time. Cogeneration is a more efficient use of fuel or heat, because otherwise ...

, with a total capacity of almost 4.5 GW. Separately, the Government also awarded a CfD to

Hinkley Point C nuclear power station Hinkley Point C nuclear power station (HPC) is a two-unit, 3,200MWe EPR nuclear power station under construction in Somerset, England. Hinckley was one of eight possible sites announced by the British government in 2010, and in November 2012 ...

, 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 three auctions were announced in February 2015, September 2017, and October 2019. Starting with AR4 in 2022, subsequent auctions have been on an annual basis. In 2024, the

Department for Energy Security and Net Zero The Department for Energy Security and Net Zero (DESNZ) is a Departments of the Government of the United Kingdom, ministerial department of the Government of the United Kingdom. It was established on 7 February 2023 by a February 2023 British ...

(DESNZ) consulted on proposed updates to the CfD starting in AR7. Two main changes to the scheme were published in October. Firstly, Adding support for repowering of onshore wind projects after 25 years of commercial operation. Support for repowering other technologies may be added in future. Secondly, extending the phased approach for fixed offshore wind projects to floating, allowing them to be built in up-to three phases to reduce construction risk. 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 includes reviewing the budgeting parameters for fixed offshore wind, and relaxing the eligibility criteria of requiring full planning permission for fixed offshore wind projects. In November 2024, the Clean Industry Bonus (CIB) was launched. This provides additional CfD support to offshore wind projects (both fixed and floating) that invest in more sustainable supply chains. However, to be applicable for AR7, offshore wind projects need a CIB. It will have a budget of £27m per GW of capacity in AR7, and the application process will run from 13 to 19 February 2025. The CIB was initially introduced as Sustainable Industry Rewards, but was later renamed.

Allocation Rounds

AR1 (2014/15)

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 (2017)

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 Triton Knoll Wind Farm is an 857 MW round 2 offshore wind farm off the coast of Lincolnshire, in the North Sea, England. RWE Npower Renewables were awarded the lease to the development area in 2003. The offshore elements of the wind farm of ...

(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 (2019)

The auction process for AR3 took place between May and September 2019, with results announced in October. 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 (2021/22)

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 MeyGen (full name MeyGen tidal energy project) is a tidal stream energy plant in the north of Scotland. The project is located in the Pentland Firth, specifically the Inner Sound between the Island of Stroma and the Scottish mainland. It is curr ...

Magallanes Renovables Magallanes Renovables, S.L. is a Spanish developer of floating tidal stream energy devices, set up in 2009. The company's head office is in Redondela, Galicia, with a UK subsidiary Magallanes Tidal Energy Ltd. based in Kirkwall. They have test ...

, and two for

Orbital Marine Power Orbital Marine Power (formerly Scotrenewables Tidal Power Ltd) is a Scottish renewable energy company focused on the development and global deployment of floating tidal stream turbine technology. The company was founded in 2002, and has built a ...

. The first contract for a floating offshore wind turbine was also awarded, to Hexicon AB for their 32 MW TwinHub project.

AR5 (2023)

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 In economics and accounting, the cost of capital is the cost of a company's funds (both debt and equity), or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". It is used to evaluate ne ...

AR6 (2024)

The auction for AR6 took place between March and September 2024. The budget was initially set at just over £1bn. Following the

election An election is a formal group decision-making process whereby a population chooses an individual or multiple individuals to hold Public administration, public office. Elections have been the usual mechanism by which modern representative d ...

, at the end of July, the budget for AR6 was increased by 50% to £1.555bn. The budget was split into three pots by technology: * Pot 1 for established technologies, initially £120m, increased to £185m, * Pot 2 for emerging technologies, initially £105m, increased to £270m (again including a ringfence for tidal stream, of £10m then £15m) * Pot 3 for offshore wind, initially £800m, increased to £1.1bn. The Administrative Strike Prices were significantly increased from AR5. The Contracts for Difference Allocation 6 results were announced on 3 September 2024, with 131 projects being awarded contracts. * offshore wind permitted reduction refers to projects that had a previously secured CfD, but have now been awarded a CfD at a higher price. The original contract allowed for up to 25% of the capacity to be withdrawn.

AR7 (2025)

The seventh Allocation Round auction is expected to happen in 2025. Prior to this, the Clean Industry Bonus applications will take place in February 2025.

Generating capacity awarded

{, class="wikitable col1left" style="text-align:right" , +Capacity awarded (MW) by technology and Allocation Round (n/a signifies technology was not eligible to bid into that auction) !Round !Nuclear !Solar PV !Onshore wind !Remote island wind !Offshore wind !Floating offshore wind !Tidal Stream !Biomass conversion !Dedicated biomass with CHP !Energy from waste with CHP !Advanced Conversion Technology !Geothermal !Total , - , Pre-AR1 , 3277 , — , — , n/a , 3101 , — , — , 1052 , 299 , — , — , — , 7729 , - , AR1 , n/a , 72 , 749 , n/a , 1162 , — , — , n/a , — , 95 , 62 , — , 2140 , - , AR2 , n/a , n/a , n/a , n/a , 3196 , — , — , n/a , 86 , — , 64 , — , 3346 , - , AR3 , n/a , — , — , 275 , 5466 , — , — , n/a , — , — , 34 , — , 5775 , - , AR4 , n/a , 2209 , 888 , 598 , 6994 , 32 , 41 , n/a , — , 30 , — , — , 10792 , - , AR5 , n/a , 1928 , 1481 , 224 , — , — , 53 , n/a , — , — , — , 12 , 3698 , - , AR6 , n/a , 3288 , 990 , — , 3363 , 400 , 28 , — , — , — , — , — , 9648 , - , Total , 3277 , 7497 , 4108 , 1096 , 23282 , 432 , 122 , 1052 , 385 , 125 , 160 , 12 , 43127

References

Renewable energy in the United Kingdom Electricity markets