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Glossary · Energy industry & energy transition

CfD, Contracts for Difference

CfD Contracts for difference Contract for difference support scheme electricity market

A CfD, short for Contract for Difference (in German: Differenzvertrag), reconciles revenues from electricity generation after the fact with a previously agreed price. In the power system, the term usually refers to a support or hedging instrument. The plant operator continues to sell its electricity on the market. Settlement then determines how far a reference price deviates from the agreed price. If the reference price is below it, the operator receives a compensation payment. If it is above, the operator under a two-sided CfD pays back the difference in full or in part. This two-sided form limits the operator's revenue risk. However, it also limits additional revenues when market prices are high. Since 2024, EU law has expressly defined the two-sided contract for difference. This means a contract between the operator of a generation plant and a counterparty, usually a public entity. The contract provides for a protected minimum remuneration and at the same time limits excessive remuneration.

The central variable is a price per unit of energy generated, usually in euros per megawatt hour (Germany: cents per kilowatt hour). This agreed price is called the exercise price or strike price. In German tender law it is called the award value (Zuschlagswert) or the applicable value (anzulegender Wert). It is not identical to the investment costs of a plant. In a competitive award, it is the revenue per megawatt hour with which a bidder can finance and operate the plant on its own assumptions. It is set against a reference price. This is derived from a market price, for example from the average day-ahead price of a bidding zone over an hour, a month or a year. The difference between the two figures, multiplied by the settled quantity, gives the payment. A simplified example: The exercise price is 60 euros/MWh, the reference price for a month is 45 euros/MWh. The operator then receives 15 euros per settled megawatt hour. If the reference price is 90 euros/MWh, the operator, with full clawback, pays back 30 euros per megawatt hour.

A CfD does not change the physical flow of electricity. The plant feeds in electricity, the grid transports it according to the rules of grid operation, and the electricity is marketed in balancing terms via the electricity market. The contract for difference acts only on the revenue side. It distributes price risks between the plant operator and a counterparty. This can be the state, a support agency or a levy-financed mechanism through which electricity consumers or taxpayers are ultimately involved. The term is therefore important above all institutionally. A CfD is neither a technical installation nor a market price. It is a rule by which market revenues are corrected and risks are allocated.

Distinction from feed-in tariffs, market premiums and PPAs

A CfD differs from a classic feed-in tariff above all in that the operator generally sells its electricity on the market itself or via a direct marketer. With a fixed feed-in tariff, the operator receives a guaranteed rate per kilowatt hour fed in, regardless of the market value of the electricity. A CfD leaves the market sale in place and settles only the difference to an agreed value.

Closely related is the sliding market premium, which the German EEG has used since 2014 as the standard case for larger plants. There too, the difference between the applicable value and a market value is compensated. The market premium, however, is one-sided. It tops up when the market value is too low. If the market value rises above the applicable value, the operator keeps the excess revenues. Economically, this corresponds to a minimum price, that is, a one-sided CfD. For a two-sided CfD, the repayment side is added: excess revenues above the agreed value are skimmed off. When CfDs are mentioned in the political debate, this symmetrical form is usually what is meant.

A Power Purchase Agreement (PPA) must also be distinguished. A PPA is a private-law electricity supply or offtake contract between a generator and a buyer, for example an industrial company. It can contain fixed prices or price formulas and thereby hedge similar risks. A CfD in the energy-policy sense, by contrast, is usually a publicly organised instrument. It is awarded through tenders and has a state or regulated counterparty. Both instruments can exist side by side but pursue different purposes. A PPA organises procurement and price hedging between market participants. A CfD is meant to enable investment in specific generation capacities and to link support costs to market revenues. EU law regards the two as complementary instruments. Support schemes are not to hinder the development of PPAs.

Why CfDs are relevant in the power system

Power generation plants with high investment costs and low variable costs depend heavily on future electricity prices. This applies above all to wind energy, photovoltaics, run-of-river hydropower, nuclear power and other low-CO₂ technologies. For these plants, costs arise mainly at the outset. Revenues, by contrast, come from electricity sales over many years. If expected market prices fluctuate strongly, capital providers demand higher risk premiums. Financing becomes more expensive, even if the generation itself may be cheap.

A CfD reduces this revenue risk. For the operator, income over the contract term becomes easier to calculate. For the public side, this can limit support costs, because repayments arise when market prices are high. The effect therefore lies not only in the payment per megawatt hour but also in lower financing costs. If a project can be financed more cheaply, the award value it needs in a tender falls. This link between market price risk, cost of capital and tender outcome is often underestimated in debates about CfDs. The EU justifies its requirements, among other things, by saying that two-sided CfDs make the revenues of supported plants more independent of the fluctuating prices of fossil-generated electricity. This fossil-generated electricity often determines the day-ahead price.

For consumers, this does not automatically mean a lower end-customer price. The end-customer price includes, besides procurement costs, grid charges, taxes, levies and sales costs. Moreover, the relief depends on how repayments are used. For new two-sided CfDs under Article 19d of the EU Electricity Market Regulation, this room for manoeuvre is limited. The revenues or their financial equivalent must be passed on to final customers. They may also finance the costs of support schemes or investments that reduce final customers' electricity costs. In the distribution, customers must retain the incentive to reduce their consumption when prices are high or to shift it to cheaper periods. This provision does not provide for free use in the general state budget.

Reference price, quantity basis and operating incentives

The specific design determines which incentives are preserved in operation. If every megawatt hour generated is topped up to a fixed price, a plant can earn revenues even when its electricity has hardly any system value. This applies, for example, at very low or negative electricity prices. With high shares of renewable energy, this question becomes more important. Many photovoltaic or wind plants generate a lot of electricity at the same times, and the market value of this feed-in then falls. This is known as the cannibalisation effect.

A CfD can be designed so that operators continue to respond to market prices. Important levers are:

  • Reference period: Hourly reference prices hedge the operator very closely. Monthly or annual averages leave it with more market risk, but also with more incentive to market better than the average.

  • Treatment of negative prices: Payments can be suspended when prices are negative, so that plants do not continue to feed in during such hours.

  • Quantity basis: Settlement can refer to actual feed-in (pay-as-produced), to potentially possible generation, or to standardised profiles and reference plants. Such so-called financial or benchmark CfDs decouple the payment more strongly from actual production.

  • Form of hedging: Besides a single exercise price, there are corridor models with a lower and upper limit, pure minimum prices, or capacity-based CfDs.

Each variant shifts risks and incentives. A pay-as-produced CfD protects strongly against price risks, but can weaken the incentives for market-oriented feed-in. Models independent of production better preserve market responses, but require more elaborate metering, modelling and settlement. EU law expressly names various forms that can count as two-sided CfDs or equivalent schemes: feed-in-based contracts with one or more exercise prices, minimum prices, and capacity-based or benchmark-based contracts for difference.

The CfD thus touches on the relationship between support and flexibility. A power system with a lot of weather-dependent generation needs generators, consumers, storage and grids that respond to scarcity and surpluses. If support rules fully neutralise price signals, operating decisions become decoupled from them. If they do not limit price risks at all, investments in capital-intensive plants may not happen or may become more expensive. The design of a CfD lies between these two poles. Article 19d therefore expressly requires two things: operation, dispatch planning, maintenance and bidding behaviour should not be distorted. And the plants should continue to participate efficiently in the markets.

EU legal framework: obligation for two-sided CfDs from July 2027

With the reform of the EU electricity market design, Article 19d was inserted into the Electricity Market Regulation (EU) 2019/943. The basis is Regulation (EU) 2024/1747 of 13 June 2024. The article governs direct price support schemes for investments in new generation plants. Such schemes must take the form of two-sided contracts for difference or equivalent schemes with the same effect. The obligation applies to contracts concluded on or after 17 July 2027. For offshore plants in hybrid projects connected to two or more bidding zones, 17 July 2029 applies.

Covered are new plants generating electricity from wind energy, solar energy, geothermal energy, hydropower without a reservoir, and nuclear energy. Participation by market participants remains voluntary. Those who do not want direct price support can finance themselves through PPAs, for example. Design principles are also prescribed:

  • Minimum remuneration and cap must be aligned with investment costs and market revenues in order to avoid overcompensation.

  • Remuneration should in principle be determined in open, transparent and non-discriminatory competitive procedures.

  • The contracts must include penalties for unilateral early termination.

  • Member States may exempt small plants and demonstration projects.

Not covered are support measures with no direct link to electricity generation, for example for storage. Likewise not covered are investment aids without direct price support, for example grants paid in advance or tax measures. Existing support contracts concluded before the cut-off date are not affected by the obligation. For repowering, significant capacity increases or lifetime extensions, Member States may voluntarily use two-sided CfDs. The European Commission examines compliance with the principles in the state aid procedure.

Implementation in Germany: status as of November 2026

In Germany, the EEG 2023 with the one-sided sliding market premium continues to apply until further notice. With the EEG amendment 2027, the Federal Government has submitted a draft bill (Bundestag printed paper 21/7867). Under it, contracts for difference are to apply in future to new supported plants from 100 kilowatts. The ministerial draft of the Federal Ministry for Economic Affairs expressly justifies this by reference to Union law. The core of the draft is a skimming-off of excess revenues in high-price phases. The market premium remains in place as downside protection. If the market value is above the applicable value, the operator under the draft pays back the difference as a refinancing contribution. The funds are to flow into the EEG account. The support costs of the EEG have been financed from the federal budget since 2023. For the plants newly supported from 2027 to 2032, the draft anticipates expenditure of about 12.8 billion euros.

In mid-November 2026, the amendment had not yet been adopted. The final deliberation by the Bundestag and Bundesrat was delayed. Completion is expected at the earliest with the Bundesrat session on 18 December 2026. After that, state aid approval by the EU Commission is still outstanding. Background to the time pressure: The state aid approval of the EEG 2023 expires at the end of 2026. Details such as reference period, thresholds, exit options and section numbers may still change in the parliamentary procedure. Only the promulgated legal text is binding.

Other countries have been using CfDs for years. The best-known example is the United Kingdom. There, the state has been awarding two-sided CfDs for renewable energy and nuclear power in auctions since the mid-2010s. The counterparty is a state-owned company.

Typical misunderstandings

A common misunderstanding is that CfDs are automatically a subsidy. With one-sided difference payments this is often true, because payments flow only to operators. With two-sided CfDs, however, repayments also arise as soon as the reference price is above the agreed price. Whether a CfD burdens or relieves the public purse depends on market prices, contract values, terms, repayment rules and the use of the funds. It is an instrument for risk sharing that can have a support character. It cannot be reduced to a simple subsidy logic.

Equally imprecise is the claim that CfDs replace the electricity market. The wholesale market remains responsible for dispatch planning, balancing and price formation, as long as plants market their volumes there. The CfD changes the revenue settlement after the market sale. However, if a large share of generation is hedged long-term via CfDs, short-term prices carry less weight in investment decisions. The market price then continues to indicate scarcity and merit order, but bears less investment risk. This shift may be intended, but must be properly classified institutionally.

Another misunderstanding concerns security of supply. A CfD for wind or solar plants creates additional generation, but not automatically firm capacity in hours with high demand and little wind or sun. For security of supply, availability, controllability, grid connection, storage, flexible demand and reserve concepts count. CfDs can trigger investments in specific capacities. They do not replace an analysis of the residual load. A power system can have a lot of supported annual generation and still need additional instruments for firm capacity or flexible demand.

The distribution of risks is also often described incompletely. If the state or a public body concludes a CfD, the price risks do not disappear. They move from private investors to the counterparty and are borne there through budget funds, levies or repayment mechanisms. This can make sense because the state can bear certain risks more cheaply or because the investments are politically desired. For a robust assessment, however, it must remain visible who pays and who benefits under which price path.

Placement within market and support policy

CfDs are relevant above all where a power system wants at the same time to accelerate investment, reduce capital costs and protect consumers from extreme shifts in revenues. They fit well with a tender: The state does not have to set a fixed price administratively; instead, projects compete for the award value. The tender then decides which plants receive a contract and at what price. This raises questions about technology differentiation, site quality, grid compatibility, realisation certainty and contract term.

The institutional side is not incidental here. A CfD needs a counterparty and a settlement body. It needs clear rules for reference prices, quantities, terms, sanctions and repayments, as well as for dealing with outages or delays. It must also be clarified how the payments are financed and booked and where the returns go. Whether a CfD creates investment certainty or generates new uncertainty depends on these details.

CfD therefore describes not a single support model with a fixed outcome, but a contract form for hedging market revenues. Its effect depends on the precise design. A CfD can facilitate investment, lower financing costs and bring repayments at high market prices. But it can also weaken price signals, shift risks into public budgets or set wrong operating incentives. Used precisely, CfD does not stand for cheap electricity, but for a rule that divides price risks between generators and a public or contractual counterparty.

Sources

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Edited by eCMS on 11.11.2026 17:13

© 2026 Erik Schmidt. All rights reserved. Quotations with a link to the source are welcome.