CfD scheme receives £22 million boost, but what is it?

Two people in hi-vis working on a site with wind turbines in the background

On August 3rd 2023, the UK Government announced increased funding for the Contracts for Difference (CfD) scheme. The scheme will receive £22 million in funding which aims to scale up renewable energy production across the country.

The new funding will go towards:

  • An increased budget for more established technologies, such as solar and offshore wind – from £170 million to £190 million;
  • An increased budget for more emerging technologies, such as floating offshore wind – up from £35 million to £37 million;
  • Maintaining the £10 million ring-fenced budget for tidal steam projects.

This uplift is slightly less than the previous year’s funding as the total figure sits at £227 million for AR5, down from £285 million.

Energy Security Secretary, Grant Shapps, said: “Today’s funding through our flagship Contracts for Difference scheme – the lifeblood of our renewables industry for nearly a decade – will help grow our economy by making Britain the first choice for investors in renewable energy projects and secure skilled jobs for future generations,

“This will be the case for established technologies like solar, and new innovations like floating offshore wind and, alongside our backing for oil and gas, carbon capture and our revival in nuclear, will ensure we can help power more of Britain from Britain for decades to come.”

A wind farm at sunset
An offshore wind farm funded through cfd scheme

What is the Contracts for Difference (CfD) scheme?

Launched in 2014, the Contracts for Difference (CfD) scheme is the UK Government’s main system for funding renewable energy generation across the country. A CfD is a long-term contractual agreement between a low carbon electricity generator and Low Carbon Contracts Company (LCCC). The agreement will provide the generator with price certainty over the duration of the contract, called the ‘Strike Price’. This works as an incentive to encourage investments in renewable energy as developers are protected from volatile wholesale costs.

How does the Contracts for Difference (CfD) scheme work?

Developers of renewable energy projects will bid for CfD contracts through auctions. The government will set out a certain amount of money that is available for the auction in advance. Developers will then provide the size of their project and the strike price. The Government will then cap the maximum amount a project can bid for through administrative strike prices (ASPs). This auction is administered by the National Grid who will rank the bids from lowest to highest based on strike price. The lowest bids will then all be accepted until they reach the maximum budget. Projects that are accepted will need to pick a delivery year. This is when they will start to generate power.

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Who is eligible for CfDs?

In order to be eligible for CfDs, generators will need to have a valid grid offer, land control and planning consent. Proof of this doesn’t guarantee a CfD though, it just gives them the opportunity to enter into the auction.

What happens after a CfD is awarded?

Following the auction, any projects that are awarded CfDs will then decide if they want to go ahead with them. This is called the Final Investment Decision. A decision will be needed within 12 months of the auction, or they will need to demonstrate that 10% of the total cost has already been spent. After the decision is made, the project will go ahead to meet their Delivery Year.

Why are CfDs important?

In order to meet our climate targets, we need to rely more and more on renewables. To do this, we need to invest in renewables. Contract for Difference (CfD) scheme is the government’s way of encouraging this. It works well to procure larger volumes of clean power at a lower cost to consumers. The CfD scheme works to encourage more and more investors to look to low carbon energy projects to help us create a more sustainable future.

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