The future of European CfDs

The European Commission has proposed to reform key electricity market regulations, with continued focus on Contracts for Difference (CfDs), a support mechanism already widely used in several European countries. CfDs have been very effective at delivering increased competition, accelerated deployment and price stabilisation for both renewables assets and consumers. 

However, as renewable penetration increased, the economic inefficiencies associated with the CfD also increase. This rasies questions over the future appropriateness of this low carbon support policy. 

There are lessons from more mature CfD markets that can guide a reformed CfD, such as including locational incentives, non-price factors and pre-commitment with indexation. A reform of the CfD, in order to extend its appropriateness, is preferred in the medium-term to its decommissioning. 

In the long-term, a post-CfD future is possible as technologies mature and are able to withstand greater levels of risk, allowing government to reduce support for maturing technologies. However, even then, some form of continued support is likely to be needed for less mature technolgies to deliver net zero commitments. 

When designing a resilient low carbon support regime for the long-term, progressively increasing risk or standardisation can form the basis of a sustaintial future model. 

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