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.

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 than 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, with a total capacity of almost 4.5 GW.

Separately, the Government also awarded a CfD to Hinkley Point C nuclear power station, 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.

The 40 gigawatt offshore wind target by 2030 was first set out in the Conservative Party manifesto for the 2019 general election and reaffirmed in the Ten Point Plan in November 2020 and the Net Zero Strategy in October 2021, with the CfD scheme identified as the primary procurement mechanism for delivering that capacity.

In 2024, the Department for Energy Security and Net Zero (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.

Mechanism and structure

Contract structure The UK's Contracts for Difference operate as two-way financial contracts between electricity generators and the Low Carbon Contracts Company, where payments flow in both directions depending on market conditions relative to a predetermined strike price. Strike prices are determined through competitive allocation rounds or administrative processes, with successful bidders securing long-term price certainty for their renewable energy projects. The reference price represents the average wholesale electricity market price over specific periods, calculated using day-ahead and within-day market data from power exchanges. Settlement occurs monthly through a systematic process where the Low Carbon Contracts Company calculates difference payments based on actual generation volumes and the gap between strike and reference prices.

Strike prices function as guaranteed minimum prices per megawatt-hour that generators receive for their electricity output, providing investment certainty for low-carbon generation projects. Reference prices serve as market benchmarks calculated from wholesale electricity prices, typically using a volume-weighted average of trading prices across multiple market timeframes. Difference payments flow from the Low Carbon Contracts Company to generators when market prices fall below strike prices, funded through consumer levies collected by electricity suppliers. Negative payments require generators to return money to the Low Carbon Contracts Company when market prices exceed strike prices, ensuring consumers benefit from higher wholesale electricity values.

Contract terms Contracts for Difference typically run for fifteen-year periods from commercial operation dates, providing long-term revenue certainty that enables project financing for capital-intensive renewable energy infrastructure. Generation capacity requirements specify minimum and maximum project sizes eligible for support, with different thresholds applying to various technologies such as offshore wind and solar photovoltaic systems. Performance obligations include availability requirements and penalties for underperformance, ensuring generators maintain operational standards and deliver contracted electricity volumes. Termination conditions cover circumstances including breach of contract terms, failure to meet construction milestones, and changes in project ownership or control structure.

Extension to other technologies Beyond the standard electricity allocation rounds, the UK government developed CfD-based frameworks for two additional low-carbon technologies.

Hydrogen production A CfD-based support mechanism for low-carbon hydrogen production was introduced through the Hydrogen Production Business Model (HPBM), announced in the UK Hydrogen Strategy in August 2021. The HPBM operates similarly to the electricity CfD, covering the difference between a hydrogen-specific strike price – representing the cost of production – and a reference price based on the market value of hydrogen. The first hydrogen allocation round (HAR1), restricted to electrolytic hydrogen projects, opened in July 2022 targeting 250 MW of production capacity, with 11 successful applicants totalling 125 MW announced in December 2023. The HPBM is administered by the Low Carbon Contracts Company, consistent with the electricity CfD framework.

Carbon capture and storage A separate CfD-based contractual framework for power generation equipped with carbon capture and storage technology – the Dispatchable Power Agreement (DPA) — was developed based on Contracts for Difference Allocation Round 4 standard terms, adapted for gas-fired generation with carbon capture. For industrial emitters, the Industrial Carbon Capture (ICC) Contract – also structured on a CfD framework – provides revenue support per tonne of captured CO₂, with the Low Carbon Contracts Company designated as the contract counterparty in August 2024. These mechanisms are distinct from the standard electricity CfD allocation rounds and are not awarded through the same competitive auction process.

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.

+Administrative Strike Prices for AR1 by technology and delivery year (£2012/MWh)Pot/Technology2014/152015/162016/172017/182018/19 Pot 1 (established)Onshore Wind (>5 MW)9595959090Solar photovoltaic (>5 MW)120120115110100Energy from Waste (with CHP)8080808080Hydro (>5 MW and <50 MW)100100100100100Landfill gas5555555555Sewage gas7575757575 Pot 2 (less established)Offshore wind155155150140140Tidal stream305305305305305Wave305305305305305Advanced Conversion Technologies (with or without CHP)155155150140140Anaerobic digestion (with or without CHP) (>5 MW)150150150140140Dedicated biomass (with CHP)125125125125125Geothermal (with or without CHP)145145145140140 Pot 3Biomass conversion105105105105105

+Results for AR1 by technology and delivery year Pot/TechnologyCapacity (MW)№ of projectsStrike Price (£2012/MWh)2015/162016/172017/182018/192015/162016/172017/182018/19Pot 1 (established)Onshore Wind (>5 MW)—4577.5626.0515—79.2379.9982.50Solar photovoltaic (>5 MW)32.8838.67——550.0079.23——Energy from Waste (with CHP)———94.75 2———80.00Pot 2 (less established)Offshore wind——7144482——119.89114.39 Advanced Conversion Technologies——36263——119.89 114.39Total32.8883.67827.501194.8027————

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 (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.

+Parameters and results for AR2 by technology and delivery year Pot/Technology (£2012/MWh)Capacity (MW)№ of projects (£2012/MWh)2021/222022/232021/222022/232021/222022/23Pot 2 (less established)Offshore wind1051008602336374.7557.50ACT (standard or advanced; with or without CHP)12511556.318674.7540.00Anaerobic digestion (with or without CHP; >5MW)140135—————Dedicated biomass (with CHP)11511585.64—274.75—Wave310300—————Tidal stream300295—————Total——1001.95234411—— AR3 (2019)