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Impact of Contracts for Differences for non-carbon electricity generation on efficiency of electricity market

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  • Veenstra, Arjen T.
  • Mulder, Machiel

Abstract

In response to the recent energy crisis, the European Commission proposed two-way Contracts for Differences (CfDs) to secure renewable energy investments and protect consumers. The proposed CfDs, however, raised concerns regarding the potential impact on electricity prices. This study examines the effects of various CfD design elements on day-ahead electricity prices, welfare, and renewable energy production. Using a partial equilibrium model of an international electricity market including thirteen European countries, we find a trade-off between stimulating renewable electricity producers to respond to negative prices, and ensuring producer certainty. We also show potential market distortions for CfDs with longer-term reference prices, particularly when strike prices deviate from expectations. Additionally, our study underscores the interactions among various players in the electricity market, in particular storage operators and international traders, and how these interactions can mitigate potential distortions from CfDs. Therefore, policymakers should carefully consider the design elements of CfDs, and weigh the promotion of renewable energy production against the efficiency of markets. Moreover, a proper reference price should be selected, to avoid further increasing electricity prices in periods with high electricity prices.

Suggested Citation

  • Veenstra, Arjen T. & Mulder, Machiel, 2024. "Impact of Contracts for Differences for non-carbon electricity generation on efficiency of electricity market," Energy Economics, Elsevier, vol. 136(C).
    • Handle: RePEc:eee:eneeco:v:136:y:2024:i:c:s0140988324003827
    DOI: 10.1016/j.eneco.2024.107674
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    Cited by:

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    2. Johanndeiter, Silke & Helistö, Niina & Bertsch, Valentin, 2025. "Does the difference make a difference? Evaluating Contracts for Difference design in a fully decarbonised European electricity market," Resource and Energy Economics, Elsevier, vol. 83(C).
    3. Giehl, Johannes & Hentschel, Dana & Ciprian, Lucia & Weibezahn, Jens, 2025. "Fueling the future: Optimizing Power-to-X production in renewable energy hubs through flexible operating units," Energy, Elsevier, vol. 333(C).
    4. Mats Kröger, 2024. "Cream-skimming through PPAs – Interactions between Private and Public Long-term Contracts for Renewable Energy," Discussion Papers of DIW Berlin 2092, DIW Berlin, German Institute for Economic Research.
    5. Cui, Linyu & Wang, Bangjun & Wang, Yue, 2026. "Reform of the new power system: A game analysis of power marketization from the perspective of carbon-green certificate coupling," Energy Policy, Elsevier, vol. 209(PA).
    6. Veenstra, Arjen T. & Mulder, Machiel, 2025. "Profitability of batteries in day-ahead and intraday electricity markets: Assessment of operation strategies with endogenous prices," Energy Economics, Elsevier, vol. 148(C).
    7. Flottmann, Jonty & Simshauser, Paul & Wild, Phillip & Todorova, Neda, 2025. "The forward market dilemma in energy-only electricity markets," Energy Economics, Elsevier, vol. 148(C).
    8. Melita Van Steenberghe & Marten Ovaere, 2025. "Market Inefficiencies in Renewable Support Policies: Evidence from Offshore Wind Contracts for Difference in Great Britain," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 25/1124, Ghent University, Faculty of Economics and Business Administration.
    9. Silke Johanndeiter & Jonas Finke & Justus Heuer, 2025. "Most certainly certain? The Impact of Contract for Difference Design on Renewables' Strike Prices and Electricity Market Risks," Papers 2512.17508, arXiv.org.

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