CFDs are due to replace the Renewables Obligation as the primary support mechanism for major new renewable energy generation and will also be available for other forms of low carbon generation such as nuclear and fossil fuel plant with carbon capture and storage (CSS). In an attempt to reduce project delays pending implementation of the legislative framework for CFDs, the Bill also makes provision for "investment contracts" directly between the Secretary of State and generators.
Feed-in Tariff Contracts for Differences
In their simplest form CFDs will adjust the income received by generators from electricity sales by providing for payments in respect of the difference between the CFD strike price and a market reference price to be made between the generator and suppliers. If the market reference price is higher than the strike price the generator pays the difference in respect of its output, where it is lower the generator receives the difference. In principle the mechanism enables low carbon generators to receive a fixed income for their output.
The Energy Bill provides the framework for the introduction of CFDs, although little detail. Detailed provisions regarding the award and content of CFDs will be set out in secondary legislation – the Secretary of State has wide powers to make Regulations about CFDs for the purposes of encouraging low carbon generation. Further details of the Government's proposals are set out in DECC's Electricity Market Reform Policy Overview and its Annexes, which were published alongside the Bill.
References in the tables below to "Sec of State" are to the Secretary of State for Energy and Climate Change. References to the Policy Overview are to the Electricity Market Reform Policy Overview and its Annexes. Numbered items in the commentary on the Energy Bill and its predecessor draft relate to the equivalently numbered matter in the Issues column.
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