On paper, Contracts for Difference (CfDs) have been a triumph for Britain’s energy transition. By guaranteeing a stable price for renewable electricity, they have unlocked billions of pounds in investment, driven down costs, and made technologies like offshore wind cheaper than anyone dared hope a decade ago.
But there’s a flaw at the heart of the system, one that recent events have laid painfully bare. CfDs, for all their strengths, are still tethered to a broken market logic: a wholesale electricity price dominated by the price of gas. And until we break that link, our clean energy future remains more vulnerable than it should be.
The CfD mechanism is clever but deceptively simple. Developers bid for a fixed “strike price” for their electricity. If the wholesale market price is lower, the government pays the difference. If its higher, developers pay the surplus back. The model promises price certainty and shields investors from wild swings in the market, in theory.
But here’s the problem: the wholesale electricity price in Britain is largely set by the cost of gas-fired generation, regardless of how much renewable energy we have on the system. In a merit-order electricity market like ours, the last — and usually most expensive — unit of energy needed to meet demand sets the price for everyone. And all too often, that unit is gas.
The result? Even when Britain’s wind farms are spinning at full tilt, the price of electricity is distorted by gas markets. And that distortion is not trivial. In the wake of Russia’s invasion of Ukraine, gas prices spiked to unprecedented levels. Wholesale electricity prices followed, dragging CfD settlements with them.
Suddenly, renewable energy projects — designed to offer price stability — were caught up in the chaos of fossil fuel volatility; they were supposed to help us escape.
This is not just a technical detail. It strikes at the credibility of the CfD system itself.
When wholesale prices soared, many CfD projects found themselves “in the money”, theoretically paying back into the system. But some projects not yet online or facing construction delays missed the opportunity to deliver cheap power when it was most needed. Meanwhile, consumers and taxpayers alike were left footing astronomical energy bills, despite Britain’s vast and growing renewable fleet.
Moreover, the extreme volatility has made it harder for developers to price risk. How do you bid for a fixed price contract when the market itself is swinging wildly based on forces — war, geopolitics, cartel decisions, that have nothing to do with the wind blowing in the North Sea or the sun shining over Suffolk?
In short, CfDs have been caught in a system they were never designed for: a market where clean energy is hostage to dirty energy’s price signals.
So where do we go from here?
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First, Britain must rethink how market prices are set
Reforming the wholesale electricity market, so that prices better reflect the actual cost of renewable generation, not the cost of gas, is urgent and necessary. A ‘split market’ approach, where clean and fossil electricity are priced separately, would be a good start.
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Second, CfD design needs to evolve
Future rounds could consider indexation models that adjust for inflationary and commodity-driven shocks or build in more flexibility for projects to delay delivery without penalty when extreme volatility makes financing irrational.
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Third, the government must accelerate investment in storage and flexible demand
A grid reliant on intermittent renewables can, and must, smooth out supply and demand without relying on expensive gas peaker plants. That would further weaken the stranglehold of gas on our power prices.
The truth is, Britain’s Contracts for Difference scheme remains one of the best policies anywhere in the world for driving clean energy growth. But it cannot, on its own, fully protect us from a market that is fundamentally misaligned with the future we are trying to build.
We have proved we can generate clean power at scale and at low cost. Now we must ensure that clean power is priced cleanly, fairly, and predictably, and free from the fossil fuel markets we are supposed to be leaving behind.
Until we do, our green energy revolution will remain shackled to yesterday’s fuels.
The post Why Britain’s Green Energy Revolution Is Still Shackled to Gas – and How CfDs Must Evolve first appeared on Haush.