The European Union has revised its Electricity Market Design to address energy price volatility while protecting consumers and maintaining a supportive framework for investments into renewables to enhance Europe’s energy security. Public remuneration schemes, such as Contracts for Difference (CfDs), have been decisive in the emergence of renewable energy projects, stimulating investments and facilitating the deployment of clean technologies during their maturation phase. However, with the increasing penetration of renewables in the electricity system, there is now a need for investments into new flexible capacities. This shift calls for a reevaluation of how solar projects can be best supported by public authorities.
In this context, several actors including ENTSO-E, Elia, Hertie School, have contributed to the European debate on the nature of CfDs. This guidance aims to assist them in the design of non-distortive Contracts for Difference that offer the right support to the solar sector. We are assessing existing and emerging CfD designs, providing a comprehensive analysis of specific design features with the help of experts from the solar industry.
Guidance for designing Contracts for Difference (CfDs)
The latest revision of the Electricity Market Design, adopted at the beginning of 2024, has identified Contracts for Difference (CfDs) as the preferred method to publicly support renewables, prompting discussions on how to make these contracts more responsive to the system's needs.
Read the paper
This paper reflects on the evolution of CfD design from the solar industry's perspective and analyses more advanced proposals currently debated. The key takeaways which are developed through the paper are:
A one-size-fits-all approach doesn't work
There is no single best CfD design. Rigorous testing and consultation are essential before developing new models. Current CfDs have demonstrably facilitated volume growth and should continue to play that role, as me move towards more hybrid systems.
We need to balance market responsiveness and investment security
While CfDs should evolve to be more responsive to market and system needs, this needs careful consideration. Solar photovoltaic (PV) investments are capital-intensive and inherently risky, requiring safeguards on the protection of solar revenues, especially at times of increasing negative prices.
Looking beyond CfDs
Not all challenges require complex CfD designs. Addressing the negative price issue requires important investments into grid deployment, digitalisation, increased use of flexible assets, and smart electrification. Most political objectives can be achieved outside the scope of CfD design, and the latter should therefore not disproportionately penalise solar PV operators.
Advanced CfDs - potential and pitfalls
More sophisticated CfDs which are not injection based are promising but present several uncertainties for solar project developers. A particular challenge is defining the reference plant profile, which should closely match reality to minimise basis risk.
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