When it comes to electricity production, the UK has been taking significant measures to incorporate renewable energy sources into its energy mix. One of the ways the government is driving investment and encouraging the construction of renewable energy projects is through the use of Contracts for Difference (CfDs).
In simple terms, a CfD is a financial agreement where the government assures renewable energy generators of a fixed minimum price they`ll receive for the electricity they generate. The guarantee is over a 15-year period, irrespective of the current electricity market price.
The UK government aims to support the energy industry while maintaining an affordable energy supply for consumers. The CfD scheme was introduced in 2014 as part of the Electricity Market Reform (EMR) programme.
CfDs work by offering a fixed price per MWh of electricity generated to renewable energy generators. This price includes a strike price and a reference price. The strike price is the fixed price that renewable energy generators will receive for their electricity, while the reference price is the average market price for electricity in the UK.
If the market price for electricity falls below the strike price, the difference between the two will be paid to renewable energy generators by the government. However, if the market price is more than the strike price, generators must pay back the difference.
The CfD scheme has been successful in driving investment in renewable energy projects. It has helped bring forward new projects and has helped existing ones get funding for future construction.
The UK government has set a target of achieving 40 GW of installed offshore wind capacity by 2030. By using CfDs, the government aims to reduce the cost of energy for UK consumers, encourage development in the renewable energy industry, reduce carbon emissions and air pollution, and increase energy security.
Conclusion
CfDs offer a financial mechanism that provides developers with long-term contracts to secure financing and reduce risks that comes with investing in renewable energy projects. By providing generators with a fixed minimum price for renewable energy, the government is encouraging investment in the renewable energy industry and supporting energy security in the UK.