Contracts for Difference (CfD) costs explained
Welcome to our Third Party Costs explained video series. Before enjoying this content we recommend you refer to our disclaimer and associated material.
The information in this video and article was accurate as of 1 April 2025. We update our TPCs Explained hub every Spring to reflect any changes.
What’s the Contracts for Difference (CfD) scheme?
The CfD scheme supports low-carbon electricity generation across Britain. By funding most new-build, large-scale wind farms, solar parks, and other renewable and low-carbon technologies, the scheme supports the government in achieving its decarbonisation goals.
As of 1 May 2025, the CfD scheme is funding 6GW of renewable electricity. In 2024/25, CfD-backed renewables supported 12% of total GB demand.
How does the CfD work?
Renewable project developers/generators compete in auctions by bidding for a strike price – a fixed price that they hope to earn per megawatt-hour of electricity produced. If successful, the generator signs a long-term contract with the government-owned Low Carbon Contracts Company (LCCC).
Each quarter the LCCC sets:
- A total reserve amount that suppliers must pay up front to cover 90% of eventualities
- An interim levy rate, charged on every eligible unit of power demand consumed by customers
Once the project is operational, it receives the strike price for every unit of power generated:
- If the wholesale market price for electricity is below the strike price, the LCCC tops up the difference to the generator
- If the market price is above the strike price, the generator pays back the difference to the LCCC
This creates price stability for the generator and cost control for consumers. However, depending on the contract, some generators aren’t paid if the wholesale market prices go negative.
The money paid out (or received) by the LCCC is funded through the CfD Supplier Obligation. They pass on this cost to end users through their energy bills.
How much of your energy bill does CfD account for?
The CfD charge is expected to make up around 5% of the total energy bill in 2025. It will become one of the fastest growing charges on the bill as the country deploys more low carbon generation throughout the next decade.
Will you know about CfD costs in advance?
Yes. The interim levy rate is known 90 days in advance. The operational cost is known a few months to several years in advance, as the Government consults on the costs in three-year tranches. However, changes can be made within period, with a month’s notice.
What drives the CfD charge?
The CfD charge depends on:
- Day-ahead (and, to a lesser extent, season-ahead) power prices
- Renewable generation volumes
- Total eligible demand on the system
To learn more about the other TPCs in your energy bill, head to our TPCs explained hub using the button below. Or, to understand more about electricity prices, download our latest bi-annual Electricity Prices Explained guide.
Go to the TPCs explained hubLegal disclosure
Cautionary Statement
This content may contain certain statements, statistics, projections, expectations (including expectations related to targets, goals or objectives such as emissions targets) and other information that are, or may be, “forward-looking statements”. Forward-looking statements often do not solely relate to historical or current facts, and may contain words such as ‘aims’, ‘believes’, ‘expects’, ‘intends’, ‘likely’, ‘plans’, ‘seeks’, and words of similar meaning.
By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that may occur in the future. Therefore, the accuracy and completeness of all such statements are not warranted or guaranteed. Although Drax believes that the statements, expectations, statistics, targets, projections and other information reflected in such statements are reasonable, they reflect Drax’s current view and no assurance can be given that they will prove to be correct or achievable. Information contained in this content, including commitments, goals, targets and objectives, and their related frameworks, methodologies or approaches, are subject to change without notice.
Actual results and outcomes may differ materially from those expressed, implied or projected by the forward-looking statements in this document. There are a number of factors, many of which are beyond the control of Drax, which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements.
Disclaimer
Whilst every effort is made to ensure the accuracy of any information or material contained in or associated with this content, none of Drax Energy Solutions Limited, their affiliates and employees, either individually or collectively accept any responsibility for any loss, damage, cost or expense of whatever kind arising directly or indirectly from or in connection with the use by any person whomsoever of any such information or material; neither do they make any express or implied representation or warranty as to the accuracy or completeness of the data, information or statements contained herein and such data, information or statements are not to be relied-upon by any party accessing such data, information or statements.