Financial contracts for differences: The problems with conventional CfDs in electricity markets and how forward contracts can help solve them

Ingmar Schlecht, Christoph Maurer and Lion Hirth

Energy Policy, 2024, vol. 186, issue C

Abstract: Contracts for differences are widely seen as a cornerstone of Europe's future electricity market design. This paper is about designing such contracts. We identify the dispatch and investment distortions that conventional CfDs cause, the patches used to overcome these shortcomings, and the problems these fixes introduce. We then propose an alternative contract we call “financial” CfD. This hybrid between conventional CfDs and forward contracts mitigates revenue risk to a substantial degree while providing undistorted incentives. Like conventional CfDs, it is long-term and tailored to technology-specific (wind, solar, nuclear) generation patterns but, like forwards, decouples payments from actual generation. The proposed contract mitigates volume risk and avoids margin calls by accepting physical assets as collateral.

Keywords: Contracts for differences; Electricity markets; Renewables; Nuclear power; Investment financing; Support schemes (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:186:y:2024:i:c:s0301421524000016

DOI: 10.1016/j.enpol.2024.113981

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