Does the difference make a difference? Evaluating Contracts for Difference design in a fully decarbonised European electricity market

Due to their ability to mitigate price risks, Contracts for Difference (CfDs) gained popularity amidst high electricity prices during the energy crisis in 2022. Depending on their specific design, CfDs are known to affect investment and dispatch decisions in electricity markets. We evaluate these effects in a fully decarbonised, sector-coupled European electricity market in terms of their impact on the power system and from an investor’s and consumer perspective. We consider four different types of governmental CfDs awarded to wind onshore power plants in a competitive auction for the contracts’ underlying strike price. On the one hand, the CfD types differ in terms of the allowed direction and unit (energy vs. capacity) of payments with consequences for dispatch decisions. On the other hand, they apply different reference prices with implications for investment decisions as reflected by optimally derived strike prices. Implementing the CfDs in an energy system optimisation model, we find that these differences affect curtailment, electrolyser load and market prices in fully decarbonised electricity markets. From a consumer’s perspective, our results show that system costs are lowest for types of CfDs that foster investments in more system-friendly power plants. For investors, in turn, these types of CfDs incur the highest discrepancy of ex ante expected and ex post realised CfD payments, such that they do not necessarily suffice to recover their costs. We conclude that this could be addressed by an adequate risk premium on the strike price, which should be subject to future research.