Contract for Difference Renewable Energy: An Overview of How It Works
Renewable energy is becoming increasingly popular as a source of power for homes and businesses. But how is renewable energy actually produced, and how is it purchased by consumers? This is where Contract for Difference renewable energy (CFD) comes into play.
A CFD is a contract between an electricity generator and the government, which guarantees a fixed price for the electricity produced by a renewable energy plant. The contract lasts for a set period of time, usually lasting between 15 to 20 years, and the price set for the electricity is usually higher than the cost of producing it. This is to incentivize the electricity generator to invest in renewable energy sources, without the risk of fluctuating prices.
The government then sells the electricity generated to consumers at market rates, and the fixed price paid to the renewable energy generators is covered by a levy on consumer bills. This means that the cost of renewable energy is spread out across all consumers, rather than being borne by those who purchase renewable energy outright.
The CFD system is designed to encourage renewable energy production and increase the capacity of the national grid. This is achieved by guaranteeing a fixed revenue stream for renewable energy generators and ensuring that they can recover their investments over time. This, in turn, creates a stable environment for investors to invest in renewable energy projects.
The CFD system was introduced in the UK in 2013 as part of the government`s Electricity Market Reform program. Its primary aim is to help the UK meet its legally binding targets of reducing carbon emissions by 80% by 2050. The CFD system has been successful in this regard, with renewable energy generation in the UK increasing significantly in recent years.
CFDs are awarded through a competitive auction process, where renewable energy companies bid for contracts to produce a certain amount of electricity. The lowest bidder is then awarded the contract. This system ensures that the government gets the best value for money and encourages renewable energy companies to reduce the cost of producing electricity.
In conclusion, the use of Contract for Difference renewable energy is a key part of the UK`s transition to a low-carbon economy. The system encourages renewable energy production and increases the capacity of the national grid, while also ensuring that investors and renewable energy generators can recover their investments. The competitive auction process ensures that the government gets the best value for money, and the cost of renewable energy is spread out across all consumers. Overall, the CFD system is an effective way to encourage investment in renewable energy and help the UK meet its climate change targets.