Financial contracts for differences: The problems with conventional CfDs in electricity markets and how forward contracts can help solve them

Energy Policy, vol. 186, pp. 113981

Abstract

Contracts for differences are widely seen as a cornerstone of Europe's future electricity market design. This paper is about designing such contracts. We identify the dispatch and investment distortions that conventional CfDs cause, the patches used to overcome these shortcomings, and the problems these fixes introduce. We then propose an alternative contract we call “financial” CfD. This hybrid between conventional CfDs and forward contracts mitigates revenue risk to a substantial degree while providing undistorted incentives. Like conventional CfDs, it is long-term and tailored to technology-specific (wind, solar, nuclear) generation patterns but, like forwards, decouples payments from actual generation. The proposed contract mitigates volume risk and avoids margin calls by accepting physical assets as collateral.

Authors 3

1. Ingmar Schlecht corresponding

   ZHAW Zurich University of Applied Sciences

   Affiliation as printed

   Neon Neue Energieökonomik GmbH, Berlin, Germany

   ZHAW Winterthur, School of Management and Law, Winterthur, Switzerland

2. Christoph Maurer Aachen Consentec GmbH

   Consentec (Germany)

   Affiliation as printed

   Consentec GmbH, Aachen, Germany

3. Lion Hirth

   Hertie School

   Affiliation as printed

   Hertie School, Berlin, Germany

   Neon Neue Energieökonomik GmbH, Berlin, Germany