Contracts for Difference: the Instrument of Choice for the Energy Transition

  • Contracts for Difference (“CfDs”), previously mainly known as financial hedging instruments, are increasingly seen as the method of choice for incentivising investment in clean energy technologies.
  • In the power sector, the CfD mechanism has emerged as the preferred arrangement to provide the required revenue support and stimulate the construction of new renewable power generating facilities.
  • Following the successful experience with renewable CfDs (in the UK and several other countries), it has been recognised that the CfD concept may be suitable for applications beyond power generation.
  • Work is in progress, initially mainly in Europe and Asia, on CfD-based business models for clean hydrogen and carbon capture and storage (“CCS”), initially to be applied to one of these technologies but potentially evolving into multi-technology schemes.
  • As an increasingly important support scheme to facilitate the global energy transition, CfDs will become an integral part of future energy markets in the coming years.

By: Agnieszka Ason , Julio Dal Poz