26 January 2026

Contracts for Difference (CfDs)

What are Contracts for Difference (CfDs)?

Contracts for Difference (CfDs) are the UK government’s primary mechanism for funding new low-carbon electricity generation. Introduced in 2014 under Electricity Market Reform, CfDs replaced the Renewables Obligation for new projects and are designed to provide price certainty for renewable and nuclear generators while protecting consumers from volatile wholesale prices.

A CfD is a contract between a low-carbon generator and the Low Carbon Contracts Company (LCCC), a government-owned entity. Under the contract, the generator is guaranteed a fixed price for the electricity it produces over a set period (typically 15 years).


How do CfDs work in practice?

CfDs operate through a payment mechanism linked to the wholesale electricity price, known as the reference price:


  • If the reference price is below the guaranteed price, the generator receives a top-up payment funded by electricity suppliers.
  • If the reference price is above the guaranteed price, the generator pays the difference back to the LCCC.


This structure adds stability for generators while ensuring consumers benefit from the extra revenue when wholesale prices are high. During the 2022–23 energy crisis, CfDs resulted in net payments flowing back to suppliers, significantly reducing policy costs on bills.

Suppliers fund CfD payments via a levy, which is then passed through to electricity customers.


Who pays the CfD levy?

The CfD levy is paid by licensed electricity suppliers and recovered from consumers as a non-commodity charge on electricity bills.

All business customers contribute unless they qualify for an exemption. Certain Energy Intensive Industries (EIIs) may be eligible for partial or full relief, depending on whether a business can meet the qualifying criteria and have their application approved.

Unlike wholesale costs, CfD charges are not influenced by site demand patterns and are therefore unavoidable for most customers.


How much is the CfD levy (and when is it revised)?

CfD charges are set on a forecast basis and reconciled after the delivery period. Once aquarter has finished and actual data is finalised, the LCCC calculates the true cost or surplus for that period.


  • If suppliers overpaid, a surplus is carried forward and future levy rates are reduced.
  • If suppliers underpaid, the shortfall is recovered in subsequent levy periods.


In p/kWh terms, CfD costs have historically ranged from around 0.3 to 1.0 p/kWh for non-domestic customers. However, this figure can fluctuate significantly depending on wholesale market conditions. In periods of high power prices, the levy can fall close to zero or even become net negative, reducing overall electricity costs.

Because CfDs are still expanding through successive allocation rounds, they will remain a material and evolving component of UK electricity policy costs for decades to come.


If you would like to ensure your CfD charges have been invoiced correctly, contact us today and we can review your recent invoices to make sure you aren't paying more than necessary.

February 2025 Review

by Craig Watson • 27 March 2026
With consumer spending declining and OFGEM raising their price cap, you would be forgiven for seeing February as a month where negative news was at the forefront, but in the energy markets, this was not the case.

2024 Review

by Craig Watson • 27 March 2026
In a year that began with falling energy prices, there were recurring catalysts that led to prices climbing steadily higher. Geopolitical uncertainty and the perennial threat of escalating conflicts meant fear would maintain a constant presence in the wholesale markets. We will look back at the key energy stories from 2024, and how the energy markets are likely to shape up in 2025. Quarter 1  The year began with cautious optimism as the UK’s gas reserve levels were healthy and prices for the Summer’24 season were in freefall. In February, prices pulled back to their lowest levels since 2021, and for the first time in a while, we identified that there was greater potential for upside risk than for further downward price movement: “ there now (exists) an asymmetrical element of risk should the market encounter a supply-side problem of significance. ” During February we had advised customers on flexible contracts that this was an ideal time for making purchases. March would see prices begin to ascend again as international conflict would create problems with LNG imports, and we would highlight the geopolitical risks as an area for concern moving forwards: “ fears remain and there are potential negative catalysts that could lead to prices rising further, with the main factors to watch out for being based on geopolitical unrest. “ For a business that purchases their energy in advance, this quarter was the optimal time for purchasing during 2024. In February, electricity prices for Winter’25 were down to 7.75p/Kwh, and as low as 6.05p/Kwh for Summer’25. Winter’25 ended the year with prices above 11.1p/Kwh, with Summer’25 prices exceeding 9p/Kwh. For a company that uses 500,000Kwh of electricity per month, the difference between buying at the February low point compared to today’s prices would represent a yearly saving of over £200,000.
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