Transitioning from RO to CfD

Gordon Moran, writing for the European Energy Centre (EEC), examines the impact of the Contracts for Difference (CfD) market on the sector so far

Last year the UK government introduced Contracts for Difference (CfD) to replace the Renewables Obligation as the primary financial support mechanism for the renewables industry in the UK.

In short, the scheme works by distributing support in the form of a variable additional payment on top of the wholesale electricity price, up to the limit of a pre-demarcated strike price. The strike price is based on a CfD with generators; they will receive a top-up when the average wholesale price is below the strike price and revenues will be capped at the strike price to avoid overcompensation.

The first round of CfD was held recently and there has been some criticism of the initial roll out of the scheme with some technologies, such as solar, receiving relatively little support. This has led to concerns that larger projects with larger economies of scale from more established technologies may win a disproportionate number of contracts.  However, consideration has also been given to more fledgling technologies: the more established technologies compete in a common auction and start up technologies are initially to receive allocated budgets to promote research and development.

In addition, the funding for the measures is provided via levies on energy producers rather than out of general taxation, which means that funding should remain secure for the long term. The strategic importance and long organisational timeframes of energy infrastructure development mean that whatever the stripes of the next UK government, it is unlikely to substantially alter the regulatory framework further and renewables should receive strong support for the foreseeable future.