In this Power System Blueprint deep dive, Dominic Scott and Monika Morawiecka discuss the merits of different types of two-sided contracts for difference (CfDs). Written in the style of a three-act Shakespearian play, the authors take a look at different CfD designs and discuss how the newer CfDs offer better solutions than traditional designs.

Although successful in stimulating renewables deployment, the first wave of deployed CfDs, which we term Traditional CfDs, brought with them inefficiencies that became increasingly apparent. The second wave of CfDs (we call them Traditional-but-Smarter CfDs) were tweaked to address the drawbacks of the first wave, but with only mixed results. 

Attention has now turned to new, innovative CfDs that build on the common innovation of decoupling support payments from outputs. Dominic and Monika explore how new designs that decouple payments from plant output — in particular the Financial CfD and Yardstick CfD — are far superior to older waves of traditional CfD design. Unlike Traditional CfDs which only hedge price risk, they hedge revenue risk and support efficiency in dispatch, maintenance and investment.

It’s recommended that policymakers consider these models when implementing any CfD support, as well as directing their attention to sharing lessons from their implementations, including designs of robust benchmarks.

The Blueprint deep dive is the second part in two-part CfD series. You can find more information on CfD efficiency and equity in financing and disbursement in the part 1 of the Blueprint deep dive series on CfDs.