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Financial Contracts for Differences

Author

Listed:
  • Schlecht, Ingmar
  • Maurer, Christoph
  • Hirth, Lion

Abstract

Contracts for differences are widely discussed as a cornerstone of Europe’s future electricity market design. This is a paper on CfD contract design. We summarize the dispatch and investment distortions that conventional CfDs cause, the patches that are used to overcome these shortcomings, and the problems these fixes introduce. We then propose an alternative contract that we dub “financial” CfD. It is a hybrid between conventional CfDs and forward contracts that mitigates revenue risk to a very large degree while providing undistorted incentives and avoiding margin calls. Like traditional CfDs, these contracts are long-term and tailored to technology-specific (wind, solar, nuclear) generation patterns but, like forwards, decouple payments from actual generation. We also propose to mitigate volume risk and to accept physical assets as collateral to avoid margin calls.

Suggested Citation

  • Schlecht, Ingmar & Maurer, Christoph & Hirth, Lion, 2023. "Financial Contracts for Differences," EconStor Preprints 268370, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:268370
    Note: *** Final Published Version Available *** : Ingmar Schlecht, Christoph Maurer and Lion Hirth (2024): "Financial contracts for differences: The problems with conventional CfDs in electricity markets and how forward contracts can help solve them", Energy Policy, Volume 186 (March 2024), Article No. 113981, https://doi.org/10.1016/j.enpol.2024.113981
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    File URL: https://www.econstor.eu/bitstream/10419/268370/1/Financial_CfD.pdf
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    References listed on IDEAS

    as
    1. David Newbery, 2023. "Efficient Renewable Electricity Support: Designing an Incentive-compatible Support Scheme," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
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    More about this item

    Keywords

    renewable energy; contracts for differences; CfDs; electricity;
    All these keywords.

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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