Contracts for Difference (UK energy)

Contracts for Difference (CfD) are the main market support mechanism or subsidy for low carbon electricity generation in the UK. The scheme replaced the Renewables Obligation which closed to new generation in March 2017. The CfD scheme is administered by the Low Carbon Contracts Company (LCCC), which is owned by the UK Government.

The scheme offers a fixed "Strike Price" to generators over a typically 15 year long contract period. This provides financial certainty, unlike the wholesale electricity market which can fluctuate significantly. With the contract for difference, 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 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, Strike Prices are quoted in 2012 prices, although this changed to 2024 prices for AR7 in 2025. Projects are paid an inflation-adjusted amount linked to the Consumer Price Index (CPI). The projects also set out a delivery year, when the projects is expected to be commissioned, however this may slip for various reasons.