Contracts-for-difference to support renewable energy technologies : considerations for design and implementation

Abstract

In this work, we present the major application and impact areas of Contracts-for-Difference (CfDs) in a European context, describe the most relevant design dimensions and discuss several design packages for CfDs as combinations of distinct design choices. We discuss these separately and in comparison. We also provide a detailed overview of CfD schemes implemented in Europe. This work comes against the backdrop of an ongoing European debate on reforming the electricity market and the broader introduction of CfDs. Leading voices in academia, the EU and its Member States agree that electricity markets must be supplemented with additional long-term options, including CfDs. Different experts advocate for different versions and implementation options of CfDs, including generation-based and generation-independent design approaches. Unfortunately, the already existing breadth and variety of design options for CfDs are not always acknowledged and hence comparisons and assessments have so far only been made on a partial foundation. A key design question for renewable support schemes in general, and CfDs in particular, is how to prevent electricity market distortions and preserve short-term, operational market integration without jeopardising the effectiveness of the schemes in leveraging investment of private capital for renewable energy deployment. We show in this report that a number of different CfD designs have already been developed aiming at preserving dispatch efficiencies and are, in fact, already implemented in various European countries. We describe how generation-based CfDs can be non-distortive for day-ahead markets based on existing designs. We discuss remaining issues that mainly arise through spill-over incentive effects across market segments (e.g. towards intraday, balancing and futures markets). We also discuss generation-independent CfDs, which have theoretical advantages over generation-based designs, in particular in relation to intraday and balancing markets, but feature unresolved implementation challenges and would imply rather significant changes in the market. We find that every CfD implementation faces numerous design choices, which all come with their own challenges and trade-offs. The answers to many CfD design questions will be highly context-specific, and evaluations for different CfD design choices must take into account the idiosyncrasies of each specific environment and market situation. With this report, we strive to contribute to an objective debate in which all stakeholders can engage in an unbiased discussion of pros and cons, strengths and weaknesses of all CfD design options, to find the best solution for each country and market situation. We strive for this report to become a comprehensive reference that provides overview and discussion of impact areas, design dimensions and choices for different CfD types. This report shall give opportunity for an informed basis for discussion of CfD designs supporting the European leap towards CfDs as a major mechanism for the support of renewable energy.