The European energy sector is facing a triple challenge: ensuring a speedy and cost-efficient rollout of renewables, protecting consumers from price shocks and safeguarding security of supply. As the 2022 energy crisis showed, political acceptance of high electricity prices is limited, and it is prudent to assume that it will remain this way. At the same time, the sheer scope of regulatory challenges associated with getting to net zero is so vast, that whenever possible, we need to find regulatory solutions that support many objectives at the same time.

In this deep dive, part of the Power System Blueprint, we look at well-designed two-sided contracts for difference (CfD) for renewables. CfDs are a promising tool to deliver on these multiple objectives. A state-backed risk-sharing tool between investors and consumers, they protect consumers from price shocks, and by lowering the cost of capital, they lower the cost of renewable energy sources deployment.

Wind and solar currently provide around one-fifth of EU electricity generation. The massive expansion plan put forward by the REPowerEU Plan means that the share of these technologies in total EU electricity generation could reach 50% by 2030. Limiting the cost of this build-out is therefore important to keep total system costs in check and preserve public support for renewables.

Note: This paper is accompanied by the related Blueprint deep dive ‘The search for an efficient two-sided CfD design efficiency – a Shakespearean history,’ which points policymakers towards innovative CfD designs that minimise the market distortions that plague many of the older and less smart CfD designs.