Contracts for Difference: How Low-Carbon Generation Is Funded

For a household, the scheme matters because its cost is collected through electricity bills. It is one of several policy levies that sit between the wholesale cost of power and the final price paid, and it is the reason new wind and solar farms get built at all when wholesale prices alone might not justify the investment. Understanding it explains a small but visible slice of the bill, and why that slice can shrink or even turn negative when gas prices are high.

Overview of the scheme and its purpose

The CfD scheme exists to encourage low-carbon generation, and legislation has been amended to make clear that this includes encouraging the continuation of, or an increase in, low-carbon electricity generation at existing generating stations, not only brand-new plants⁸. It is the government's principal tool for bringing forward new wind, solar and other clean generation in Great Britain¹.

The scheme's defining feature is price certainty. A generator that wins a contract knows what it will be paid for its electricity for the next 15 years, which removes the risk of investing billions in an offshore wind farm only for wholesale prices to collapse. That certainty is what unlocks private capital: the seventh and related allocation rounds have unlocked £27 billion in private investment, according to official performance reporting⁷.

For the household, the scheme is a bet on insulation from gas. Because CfD-backed generators are paid a fixed price regardless of the gas-driven wholesale market, their output becomes steadily cheaper relative to gas-fired power as fossil fuel prices rise. The trade-off is that bill payers carry the cost when wholesale prices are low, and the scheme's designers accepted that in exchange for the payback that flows the other way when prices are high.

The process explained: strike prices, top-up payments and paybacks

The scheme guarantees a minimum price that generation companies will be paid for their electricity. When the wholesale price falls below that guaranteed price, suppliers top up the difference, and the cost is collected through consumers' electricity bills⁹. The guaranteed level is called the strike price, and it is the number that decides everything else about the scheme.

The mechanism runs both ways. When the wholesale price is above the strike price, the generator pays the difference back rather than receiving a top-up, and that money flows back to consumers through their suppliers⁹. This is not a one-way subsidy but a two-way contract that stabilises the generator's revenue while exposing bill payers only when wholesale prices are low.

The scheme showed its payback side in dramatic fashion during the energy crisis. The UK's portfolio of CfD-backed projects paid back to billpayers for the first time ever in September 2021, when record gas prices pushed wholesale electricity above the fixed contract prices⁶. Between November 2021 and January 2022, CfD projects paid back £114.4 million to consumers³. One assessment of the wholesale price under these contracts put it at £50/MWh (5p/kWh) and dropping, in comparison with the £200/MWh of the main market¹⁰.

Auction rounds for established and newer technologies

CfDs are awarded through regular, competitive auctions¹. The format is a reverse auction: rather than buyers bidding prices up, would-be generators bid the strike price they will accept down, and the cheapest credible bids win contracts³. This is how the government avoids simply handing generators whatever price they ask for.

The auctions separate technologies at different stages of maturity, so that established, cheap technologies such as solar and onshore wind are not forced to compete against less established, more expensive ones such as floating offshore wind. In the reforms published ahead of allocation round 7, the government went further and split the offshore wind results from other technologies³. The seventh auction round, announced in January 2026, was a record: five fixed-foundation offshore projects totalling 8.25GW and two floating projects totalling 192.5MW secured contracts³.

The separation matters for bill payers because it determines which strike prices end up on the bill. Established technologies clear at prices close to the wholesale market, while less established ones clear far higher, reflecting the genuine cost of building something for the first few times. The scheme's designers treat that premium as the price of building an industry that later auctions can buy from cheaply.

Strike prices by technology: what recent auctions cleared

The most recent CfD auction cleared at below £72/MWh for solar, £73/MWh for onshore wind and £78/MWh for offshore wind, in 2025 prices¹¹. These figures show how far established renewables have fallen in cost: solar's strike price in the sixth allocation round was £50 per MWh, up from £47 in 2023¹².

The gap between the two offshore wind figures reflects the auction round and the price basis rather than a contradiction: the £78/MWh figure is in 2025 prices and the £91.20/MWh AR7 figure is in 2024 prices³. Floating offshore wind, at £216.46/MWh, sits far above everything else because it is a young technology with only a handful of projects built worldwide³.

For a household, these numbers are the clearest evidence that new renewable generation is now among the cheapest power available. A strike price of £50 to £78/MWh is well below the gas-driven wholesale prices that dominated the crisis years, which is why the scheme's cost on bills has been falling.

Bill impact: £1.8 billion annually and declining

The CfD scheme adds £1.8 billion a year to domestic bills, alongside the £1 billion added by the Capacity Market⁴. Put against the whole electricity market, CfDs currently account for less than 3% of average electricity bills, down from 5% before the crisis⁵.

Two things drive that falling share. First, the expensive early contracts signed in the mid-2010s are expiring and being replaced by far cheaper ones. Second, when wholesale prices are high, the scheme pays money back rather than costing anything at all, as it did from late 2021³. The scheme remains the UK Government's main mechanism for supporting new low-carbon electricity generation projects in Great Britain, so the cost on bills tracks the price of new auctions rather than the legacy portfolio³.

Ofgem consulted in 2026 on changes to how the CfD cost allowance is set within the price cap, seeking views on improving the accuracy of the allowance and on a potential simplification of the methodology, with the consultation closed and awaiting decision as of July 2026¹³. That matters because the allowance determines how the scheme's cost is spread across bills between cap periods.

Contracts run for 15 years and rise with inflation

CfDs are 15-year private law contracts¹. The scheme guarantees a set price per MWh of electricity for 15 years, indexed to inflation, and the current CfD term is 15 years¹. Generators are therefore given price certainty over the 15-year lifetime of a contract².

The inflation indexing cuts both ways for bill payers. It protects the generator from being eroded by rising costs over a decade and a half, but it also means the strike price rises with inflation rather than staying at its original nominal level. The 15-year term is long enough to cover the financing period of a major offshore wind farm, which is the point: the contract exists to make large capital projects bankable.

Because the contracts are private law rather than direct public spending, the money never passes through government accounts in the ordinary way. It flows through suppliers and bills, which is why the scheme's cost appears as a levy on electricity rather than as a line in the public accounts.

The scheme's place in the broader energy supply landscape

The CfD scheme is one piece of the machinery that determines where Britain's electricity comes from and what it costs. It sits alongside the wholesale market, where gas still often sets the price, and the Capacity Market, which pays for firm capacity to be available when needed⁴. The interaction matters: expensive gas, not net zero policy, has been the main driver of high UK electricity prices, and CfD contracts are one of the few parts of the bill that move in the opposite direction to gas⁵.

For a household thinking about energy independence, the scheme is part of the background that makes home generation and storage worth comparing against. The strike prices of £50 to £78/MWh for established renewables¹¹ set a benchmark for what grid electricity from new clean sources actually costs to produce, before network charges, supplier margins and levies are added. To see how those other layers build up the final bill, and how Britain's generation mix fits together, see UK Energy Supply, the wholesale energy markets, the Capacity Market and the UK electricity generation mix.