Contracts-for-Difference and Nuclear Flexibility: A Path to Complementing Renewables

Ange Blanchard and Ramteen Sioshansi
Additional contact information
Ange Blanchard: Chaire économie du climat - CEC - Chaire économie du climat, LGI - Laboratoire Génie Industriel - CentraleSupélec - Université Paris-Saclay
Ramteen Sioshansi: CMU - Carnegie Mellon University [Pittsburgh]

Post-Print from HAL

Abstract: Contracts-for-Difference (CfDs) shift the electricity price risk from producers to third parties, typically governments, and have been instrumental in fostering renewable energy investment in liberalized electricity markets. As Western countries turn to CfDs to support new nuclear power plant (NPP) investments, concerns arise regarding their impact on short-term dispatch. By shielding producers from real-time wholesale prices, CfDs can distort dispatch incentives, leading to inefficiencies. Innovative CfD designs have been proposed in the literature to mitigate these effects, some of which have already materialized in some countries. This paper assesses how different CfD designs influence nuclear dispatch decisions in a projected 2040 Central Western Europe electricity market. Using a partial equilibrium model formulated as a Mathematical Program with Equilibrium Constraints (MPEC) and solved as a Mixed Integer Quadratically Constrained Program (MIQCP), we reveal unintended consequences. Notably, a CfD with negative-price interruption can induce NPP operators to reduce availability in moments of soaring prices, resulting in higher general prices than the first-best solution. This results from nuclear plants' limited flexibility: operators must balance producing at low output levels during negative prices with maximizing production at other times to secure the strike price. We show how a non-production-based CfD design can partially alleviate this problem and improve NPPs' short-term dispatch, although we show the latter cannot restore the optimal dispatch either. These findings emphasize the critical importance of careful CfD design and ongoing regulatory oversight as governments expand CfD applications to nuclear power.

Keywords: Nuclear Energy; Contract-for-Difference; Flexibility (search for similar items in EconPapers)
Date: 2025-06-15
References: Add references at CitEc
Citations:

Published in 46th IAEE International Conference, IAEE, Jun 2025, Paris, France

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05155642

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().