Designing Contracts for Difference for the EU Power Markets: Trade-off between Incentives and Risks

Kevin Favre and Fabien Roques
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Kevin Favre: LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: The European electricity markets are exploring long-term contracts as a means of providing revenues stability for private investors and protecting consumers. Contracts for Difference (CfD) are seen as part of the solution, but their classical form has limitations in terms of incentives. As a result, academics, policymakers and industry experts are proposing adapted designs that raise questions about the balance between providing the right incentives and allocating risks. This paper examines how adjustments to classical CfDs affect the incentives and risks between the investors and the public counterparty. Adapted CfD designs are evaluated using a realistic power system model. Preliminary results show a trade-off between incentives and risk, which depends on the technology under consideration. Incentives require greater exposure to short-term price signals at the cost of higher revenue volatility. The paper aims to help policymakers determine the appropriate design of CfDs, considering incentives, risk preferences and technology.

Keywords: Industries; Adaptation models; Costs; Europe; Power system stability; Electricity supply industry; Stability analysis; Power markets; Electricity markets; Power system economics; Public policy; Risk analysis (search for similar items in EconPapers)
Date: 2023-06
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Published in 2023 19th International Conference on the European Energy Market, Jun 2023, Lappeenranta, Finland. pp.579-584, ⟨10.1109/EEM58374.2023.10161790⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04442560

DOI: 10.1109/EEM58374.2023.10161790

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