The Enduring Role of Contracts for Difference in Risk Management and Market Creation for Renewables

Governments procure renewables through a variety of mechanisms. Contracts for difference (CfDs) have been used for more than 50% of the global offshore wind supply. The payments awarded through CfDs are sometimes labelled subsidies, suggesting that they support uneconomic activity. Here, we argue that the primary role of CfDs is rather risk management by creating a market for electricity supply at stable long-term prices. Similar to its use in other sectors of the economy, this contract type transforms a variable to a fixed price to reallocate volatility risks. Such long-term contracts are often necessary for renewables financing due to limited hedging options in existing markets. Our perspective could imply a shift in perception towards CfDs as a fundamental and lasting market feature. We hope to stimulate a timely discussion about the impact of greater CfD diffusion on electricity market mechanisms, risk allocation and the potential for combining fragmented streams of energy finance, market and policy research.