Contract for Difference (CfD)

Contract for Difference (CfD) is an agreement between two parties where they agree on a reference price. In the case of CfDs in the energy sector, the contract is concluded between an energy producer and a public entity, such as the state or a state-owned company.

How Does a Contract for Difference Work in the Energy Sector?

• Reference Price: A reference price is set, which is the execution price of the contract. This price is determined through a tender and reflects the costs of energy production.
• Price Difference: If the market price of energy is lower than the reference price, the public entity pays the producer the difference to ensure profitability. Conversely, if the market price is higher than the reference price, the producer refunds the surplus to the public entity.
• Financial Stability: CfDs provide producers with stable revenues, even in the face of market price volatility, making it easier to plan investments.
•  
• Application: These contracts are widely used in Europe, including in the UK, Denmark, Italy, France, Germany, and Poland, as a tool to support the development of renewable energy.