Summary and Background Part 2: Electricity Market Reform Chapter 2: Contracts for difference
10.The contract for difference (CFD) aims to tackle the lack of investment in low carbon electricity generation allowing the Government to achieve its objectives under the Electricity Market Reform to:
	ensure the future security of electricity supplies,
	drive the decarbonisation of our electricity generation, and
	minimise costs to the consumer.
11.The CFD provides developers of eligible low carbon electricity generation with a long term contract that provides for a stable revenue stream which facilitates investment in low carbon. Most CFDs will be allocated by the operator of the national electricity transmission system (currently National Grid Electricity Transmission PLC) who will determine the eligibility of the applicant and issue a notification, in line with the regulations to be made by the Secretary of State, to the CFD counterparty to offer a contract to the eligible generator. In the longer term allocation of CFDs and strike prices, see paragraph 12, will be determined by a competitive process. In exceptional cases the Secretary of State will allocate CFDs to individual projects which have been individually negotiated. Such individual negotiations are likely to take place where the standard terms of a CFD might not be suited and will need to be tailored to the circumstances of the project. Where the Secretary of State has individually negotiated a CFD he or she will then direct the CFD counterparty to offer such contracts. Thereafter the CFD counterparty will be in a commercial relationship with the generators, governed by the terms of the CFD.
12.In most cases the mechanism will work by setting a “strike price” (a price per unit of electricity generated) which will be at the level determined to be necessary to support the particular technologies supported by the scheme. The contracts will also refer to a “reference price” which is a price which attempts to reflect the wholesale electricity price at a particular time. Generators will sell their generation into the market (as normal) and, where the strike price exceeds the reference price, the counterparty will pay the generators the difference between the strike price and the reference price. The combination of the payment from the CFD counterparty, and the revenue from the sale of electricity, should ensure that a generator broadly receives the strike price.
13.When the reference price is above an agreed strike price, payments will be made by the generator to the CFD counterparty. This clawback is aimed at ensuring that generators only receive the revenue necessary to support them. When the reference price is above an agreed strike price, payments will be made by the generator to the CFD counterparty. There may be variations on this “two-way” CFD model in order to support different types of generation whilst still retaining sensible incentives to generate.
14.The cost of the contracts to the CFD counterparty will be met by licensed electricity suppliers (both those licensed in Great Britain and those licensed in Northern Ireland) and it is anticipated that the costs of the CFD counterparty itself will be met from the same source. Suppliers in turn are likely to pass such costs onto consumers. Where the CFD counterparty receives payments back from generators under the contracts these will be passed on to suppliers.
15.Aspects of the operation of the CFD counterparty will be regulated by the Secretary of State. This is designed to ensure the protection of suppliers and ultimately consumers.