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Contracts for Difference (CfDs)
A guide to the UK's primary mechanism for supporting low-carbon electricity generation.
A comprehensive guide to Contracts for Difference for UK generators
Contracts for Difference (CfDs) underpin how the UK supports new low-carbon electricity generation. This guide explains what a CfD is, how the scheme works, how generators win one, and how it sits alongside a Power Purchase Agreement (PPA) to form a complete route to market.
What is a Contract for Difference?
A Contract for Difference is a long-term, private law contract between a renewable generator and the Low Carbon Contracts Company (LCCC), the government-owned body that manages the scheme. It is the UK Government's flagship mechanism for incentivising investment in low-carbon generation.
But a CfD is not a complete route to market
A CfD provides revenue support by protecting generators from wholesale price volatility, but it does not sell their electricity. Generators still need a route to market arrangement to access the wholesale market, manage trading obligations and receive payment for exported power. Together, the CfD and PPA form the commercial framework that enables a renewable project to operate and generate revenue.
A CfD works by topping up or recovering a generator's revenue, so that in effect it earns a stable price for every unit of electricity it produces. These are the core mechanics:
The fixed, pre-agreed price per MWh that a generator will receive, set competitively at auction. It reflects the estimated lifetime cost of a project and, once agreed, is indexed to inflation each year.
The market price that the strike price is measured against. For intermittent renewables such as wind and solar, this is the Intermittent Market Reference Price (IMRP), based on day-ahead hourly prices. For baseload technologies, a season-ahead Baseload Market Reference Price is used instead.
When the reference price sits below the strike price, the LCCC pays the generator the difference, guaranteeing the agreed price even when wholesale prices are low.
When the reference price rises above the strike price, the flow reverses, and the generator pays the difference back to the LCCC. This two-way structure protects generators from low prices and consumers from high ones.
When the reference price falls below zero, top-up payments are suspended for those settlement periods. This applies to contracts awarded from Allocation Round 4 onwards, while earlier CfDs had different rules. Either way, the rule removes the incentive to keep generating when the system is oversupplied.
Effective negative price management remains an important consideration for generators. For how generators can manage this exposure in practice, see our FAQs below.
CfDs deliver revenue certainty over a long horizon, historically 15 years and, since AR7, up to 20 years for key technologies. That visibility and predictability helps de-risk projects and makes it easier to secure finance.
The scheme is funded through a levy on licensed electricity suppliers, collected by the LCCC. When generators pay money back in high-price periods, those funds flow back to suppliers and, ultimately, to consumers.
Why CfDs matter for UK generators
The CfD allocation process
Generators do not simply sign up for a CfD. They compete for one through a structured, periodic auction known as an allocation round. Each round follows the same broad stages.
Eligibility
To be eligible, a project must use a qualifying low-carbon technology and typically have a capacity above 5MW. Applicants must meet planning, supply chain and grid connection requirements, and these criteria have tightened each round.
For AR8, projects must hold a Gate 2 connection agreement (or a Gate 1 connection point and capacity reservation) to take part, effectively reserving the auction for projects closer to being shovel-ready.
Technology pots
Eligible technologies are grouped into pots, so that established, lower-cost technologies compete separately from emerging ones. This stops newer technologies from being priced out by mature ones and lets the government direct the budget where it is needed. The exact pot structure is set for each round.
Sealed-bid auction
Generators submit sealed bids stating the price at which they are willing to deliver. Contracts are awarded from the lowest bid upwards until a pot's budget or capacity is used up, setting a single clearing strike price for each technology. This competitive design is what has driven strike prices down over successive rounds.
Award and delivery
Successful projects are offered a CfD by the LCCC and move into delivery, working towards milestones such as final investment decisions (FID) and commissioning dates. From here, most generators turn their attention to securing a route to market, since the CfD sets the price but not the physical sale of power. For many projects, the structure and bankability of the PPA becomes just as important as the CfD itself in progressing towards commercial operation.
CfD allocation rounds to date
Seven allocation rounds have taken place since the scheme launched in 2014, and each has shaped how the next was designed.
AR8 and the wider reform agenda
Allocation Round 8 (AR8) is now underway, with the application window having opened on 20 July 2026. It builds directly on AR7 and carries a set of reforms designed to prioritise deliverability, fairness and readiness. The headline changes are:
Timing and where to follow it
Applications opened on 20 July 2026 and closed on 7 August 2026, with results expected between late 2026 and early 2027 depending on the appeals scenario. Because the schedule has a number of moving parts and can shift as the round progresses, we recommend following the official source for the live timeline.
Register for our upcoming AR8 webinar
Join our energy experts for our upcoming CfD AR8 webinar, where we will unpack the round's reforms, the new pot structure and what the results could mean for developers and investors.
Following our well-received AR7 webinar with Cornwall Insight, this session is built for generators, developers and investors weighing their route to market options for the round ahead. Register below to secure your place and receive the on-demand recording.
How CfDs and PPAs work together
A CfD guarantees a generator a stable strike price, but it does not sell the electricity. The physical power a project produces still has to be sold into the market, and that is where a Power Purchase Agreement (PPA) comes in.
The CfD provides revenue certainty and the PPA provides the route to market. The two work together; the CfD sets the price backstop, while the PPA is the commercial agreement through which a generator actually sells its output, manages imbalance and gets paid. This is why many UK CfD-backed projects operate with both contracts in place.
Our CfD PPA aligns with the commercial terms of the CfD agreement, offers a flexible framework supporting the transition from pre-construction, through to commissioning and full operation, and provides the bankability and financial strength to hold up over the long term. Weighing these factors early, often before auction outcomes are known, is increasingly how developers strengthen investor confidence.
How a PPA helps manage risk
Even with a CfD in place, generators remain exposed to a number of commercial and operational risks. A CfD PPA can help manage these risks, support day-to-day operation and maximise the revenues of a renewable asset.
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Imbalance risk
Renewable generation does not always match forecast output, creating imbalance costs. PPA providers can offer trading strategies and imbalance-sharing mechanisms to help manage this exposure.
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Negative pricing risk
CfD payments may be reduced or suspended during periods of negative pricing. PPAs can help generators manage this exposure through trading arrangements.
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Market price risk
Even with a CfD, generators may still have exposure to market dynamics and route to market costs. PPA structures can help manage this exposure and support long-term revenue certainty.
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Counterparty risk
The financial strength of an offtaker is an important consideration for renewable projects. A creditworthy offtaker can help give developers and investors confidence in the long-term reliability of their PPA.
CfD insights and market intelligence
What Allocation Round 8 tells us about the future of the CfD scheme
From development to investment: What UK energy projects need to unlock investor confidence
CfD AR8 reforms: What developers and investors need to know after AR7
CfD AR7 results: Key trends and takeaways
CfD AR7 offshore wind results and the road to clean power
Repowering progress: Innovation and opportunity for wind in CfD AR7
The role of CfD and CPPAs in the UK PPA market
Frequently asked questions
What is a Contract for Difference?
A long-term contract that pays a low-carbon generator a stable, pre-agreed price for its electricity. It tops up revenue when market prices are low and reclaims the difference when they are high.
How long does a CfD contract last?
Traditionally 15 years. From Allocation Round 7 onwards, the term was extended to 20 years for key technologies including offshore wind, onshore wind and solar.
Who is eligible to bid for a CfD?
Low-carbon electricity generators using a qualifying technology, typically above 5MW, that meet the round's planning, supply chain and grid connection requirements. AR8 requires a Gate 2 connection agreement, with a transitional allowance for Gate 1 connection point and capacity reservation.
What happens after a project wins a CfD?
Developers must satisfy various contractual milestones and progress their project towards construction and operation before receiving CfD support. Once awarded a CfD, many projects will focus on reaching Final Investment Decision (FID), which often involves securing financing, meeting contractual requirements and establishing a bankable route to market through a suitable PPA.
What is the difference between a CfD and a PPA?
A CfD sets a stable price for a generator's electricity but does not buy the power. A PPA is the agreement through which the electricity is actually sold. Many projects use both.
How can a CfD PPA help maximise project value?
Beyond providing a route to market, a well-structured CfD PPA can help optimise revenues, manage balancing risks and support financing requirements.
What happens when the market price is above the strike price?
The generator pays the difference back to the LCCC. The contract works both ways, protecting generators when prices are low and consumers when prices are high.
What is the Intermittent Market Reference Price (IMRP)?
The reference price used for intermittent renewables such as wind and solar, based on day-ahead hourly market prices. It is the figure a variable generator's strike price is measured against.
From the CfD commencement date, SmartestEnergy will pay IMRP, with discounts for up to 20 years.
When will AR8 open?
The application window opened on 20 July 2026 and closed on 7 August 2026. Results are expected between late 2026 and early 2027, depending on appeals.
How do CfD strike prices compare to wholesale market prices?
Strike prices reflect the long-term cost of building and running a project, so they can sit above or below wholesale prices at any moment. What a CfD offers is stability across the life of the contract.
How can generators manage negative pricing?
Negative prices usually appear when supply outstrips demand, often on windy or sunny days. Because CfD top-up payments are withheld during these periods, generating through them can mean selling at a loss.
Generators can respond by curtailing output when prices turn negative, or by co-locating battery storage to shift power to higher-priced hours, an approach AR8's proposed hybrid metering reforms are designed to support.
A strong route to market helps too: our CfD PPA pairs your contract with a bankable offtake arrangement that manages imbalance risk and negative price exposure.
Speak to a CfD expert
Every CfD-backed project needs a route to market. Our team can help you find the structure that fits your asset, aligns with your CfD terms and comes from a counterparty you can rely on long-term.