Financial Contracts for Differences

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: doi:10.1016/j.enpol.2024.113981

Classification and Topics

• Classification: Wirtschaft
• Subject: renewable energy ; contracts for differences ; CfDs ; electricity

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Schlecht, Ingmar ; Maurer, Christoph ; Hirth, Lion
• Event: Veröffentlichung
• (who): ZBW - Leibniz Information Centre for Economics
• (where): Kiel, Hamburg
• (when): 2023

Further information

• Handle: http://hdl.handle.net/10419/268370
• Last update: 10.03.2025, 11:43 AM CET