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Financial contracts for differences: The problems with conventional CfDs in electricity markets and how forward contracts can help solve them

  • Contracts for differences are widely seen as a cornerstone of Europe's future electricity market design. This paper is about designing such contracts. We identify the dispatch and investment distortions that conventional CfDs cause, the patches used to overcome these shortcomings, and the problems these fixes introduce. We then propose an alternative contract we call “financial” CfD. This hybrid between conventional CfDs and forward contracts mitigates revenue risk to a substantial degree while providing undistorted incentives. Like conventional CfDs, it is long-term and tailored to technology-specific (wind, solar, nuclear) generation patterns but, like forwards, decouples payments from actual generation. The proposed contract mitigates volume risk and avoids margin calls by accepting physical assets as collateral.

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Metadaten
Document Type:Article
Language:English
Author(s):Ingmar SchlechtORCiD, Christoph Maurer, Lion HirthORCiD
Parent Title (English):Energy Policy
Publication year:2024
Publishing Institution:Hertie School
DOI:https://doi.org/10.1016/j.enpol.2024.113981
Release Date:2024/04/17
Tag:General Energy; Management, Monitoring, Policy and Law
Volume:186
Article Number:113981
AY 23/24:AY 23/24
Licence of document (German):Metadaten / metadata
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