The Contracts for Difference (CfD) scheme is the UK Government’s main mechanism for supporting new, low carbon electricity generation projects.

The government is considering a number of changes to the way the CfD scheme operates so that it can continue to support new generation and provide value for bill payers for the next allocation round.

First and foremost, it is necessary to acknowledge that the CfD scheme has been extremely successful in achieving its objectives:

• Strike prices have come down over successive allocation rounds with, for example, the strike price for offshore wind reducing by some two thirds over just the last five years;
• Projects are delivering generation within their Targeted Commissioning Windows; and
• CfDs have enabled low carbon generation to be delivered at scale cost effectively.

However, Energy Systems Catapult welcomes this call for evidence that recognises CfD generators are being insulated from wholesale market signals and incentives to export power in accordance with the needs of the power system. We also welcome that the Government is open to promptly implementing any changes identified as a consequence of this call for evidence, in the fourth allocation round. However, we think that the scope of this call for evidence should be broadened to cover the two areas outlined below.

Contracts for Difference: Energy

As with all innovation support policies, it is necessary to review the purpose and performance of CfDs alongside development of the industries involved, the challenges they face, particularly with respect to present and future market conditions.

A review of such evidence is crucial given the Government’s ambition for scale-up, which we warmly welcome. We are hopeful the upcoming Energy White Paper will open up the opportunity for a more fundamental review of electricity market arrangements including CFDs.

Particularly relevant to reforming the CfD scheme would be an evaluation of:

1. The impact of CfD design on the functioning of electricity markets and incentives to invest
   in flexibility and system integration due to the behaviour of CfD recipients in electricity and
   financial markets;
2. The extent to which undesirable market impacts can be mitigated through reforms to CfD design without compromising build and supply of low-cost finance at the needed rate for Net Zero;
3. The readiness of electricity markets (and related financial markets) for variable renewables, which determines the extent to which CfD design could be adapted/removed to expose technologies to markets.

Please download for our full response.