Contract for Difference (Power Markets)
In power markets, a contract for difference is a long-term arrangement that pays a generator the difference between a market reference price and an agreed strike price when the market is lower, and usually requires it to pay back when the market is higher. It is different from the leveraged trading CFDs offered by brokers.
Wind farms cost a lot up front but earn revenue for decades at unpredictable prices. A power-market CfD swaps that uncertainty for a fixed price, which is why governments use it to fund new low-carbon generation.
- Category
- Commodities, Energy and Carbon
- Reading time
- 4 min
- Also called
- CfD (power), Two-sided CfD, Strike-price contract
- Updated
A power CfD in plain words
In Great Britain, the CfD scheme is the government's main tool for supporting low-carbon power.1
Generators receive the difference between a strike price and a reference price, the average GB market price, over a 15-year period.1
It protects developers from volatile wholesale prices and protects consumers from paying more support when prices are high.1
How a power CfD works
Policy set
The government sets allocation rules, budgets and administrative strike prices.2
Auction
Projects bid in an allocation round and winners get a contract.
Counterparty
A state-owned counterparty issues and manages the contracts and makes payments.1
Sell power
The generator sells electricity in the normal market.
Settle the difference
It is paid strike minus reference when the market is below strike.1
Pay back when high
When the market is above strike, the generator pays the difference, protecting consumers.1
Worked examples
Example 1 — Market below strike
Locked at £70/MWhHypothetical strike £70/MWh, reference £50/MWh, output 1,000 MWh.
| Market revenue | 1,000 × £50 = £50,000 |
| CfD top-up | (£70 − £50) × 1,000 = £20,000 |
| Total | £50,000 + £20,000 = £70,000 |
The top-up is the difference between strike and reference price.1
Example 2 — Market above strike
Still £70/MWhSame contract, reference £90/MWh.
| Market revenue | 1,000 × £90 = £90,000 |
| Pay back | (£90 − £70) × 1,000 = £20,000 |
| Net | £90,000 − £20,000 = £70,000 |
This two-way payment is how the scheme protects consumers when prices are high.1
Example 3 — Capture price gap
£65/MWh realised, not £70The generator actually sells at £45/MWh while the reference is £50/MWh, strike £70/MWh.
| Market revenue | 1,000 × £45 = £45,000 |
| CfD top-up | (£70 − £50) × 1,000 = £20,000 |
| Total | £45,000 + £20,000 = £65,000 |
The payment is set against the reference price, an average of market prices, so a generator that sells below it still loses out.1
Power CfD vs broker trading CFD
| Aspect | Power-market CfD | Broker trading CFD |
|---|---|---|
| Purpose | Revenue stability for generators | Leveraged speculation on price moves |
| Term | Many years (15 in GB) | Days to weeks, often |
| Counterparty | Government-backed company | The broker |
| Physical output | Linked to real generation | None |
Where power CfDs are used
Offshore wind
Financing projects with high upfront costs.
Solar and onshore wind
Stabilising long-term revenue.
New nuclear
Guaranteeing a price over a long term.
Consumer protection
Clawing back windfall revenue in high-price periods.
Advantages and disadvantages
Advantages
- Removes wholesale price risk for the generator.
- Lowers financing costs for projects.
- Protects consumers when prices spike.
- Competitive auctions reveal costs.
Disadvantages
- Generators give up upside when prices are high.
- Reference-price mismatch leaves basis risk.
- Policy and counterparty terms can change between rounds.
- Long contracts can lock in prices that later look high.
Going deeper
Read as far as you need. Each level builds on the one before it.
Fixed price
Beginner
Strike minus reference is paid, so the generator effectively earns the strike.1
Two-way
Intermediate
Payments flow back when market prices are high, protecting consumers.1
Basis and governance
Advanced
Settlement uses an average reference price, so capture-price gaps remain; allocation rules and strike prices are set by policy.2
Common mistakes
Confusing with trading CFDs
Thinking it's a leveraged retail product.
Ignoring pay-back
Forgetting payments flow both ways.
Assuming perfect hedge
Overlooking reference-price mismatch.
Generalising one country
Assuming all countries' schemes work like GB's.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A power CfD fixes a generator's price at the strike.
- Payments are strike minus reference.
- Two-sided CfDs pay back when markets are high.
- They differ entirely from broker CFDs.
- Scheme rules vary by country and round.
Frequently asked questions
Can retail traders buy a power CfD?
Who pays for the top-ups?
Do other countries use CfDs?
Further learning
- Contract for Difference
The trading product with the same name.
- Hedging
Locking in prices.
- Counterparty Risk
Who stands behind payments.
- Volatility
The risk CfDs remove.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- GOV.UK (DESNZ). Contracts for Difference (opens in a new tab) Checked .
- Low Carbon Contracts Company. Contracts for Difference (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.