Back to knowledge
Contracts for difference (CFD)

Instrument Overview

Contracts for Difference (CFDs) are agreements that offer cities a way to guarantee a fixed price for clean energy or services. If market prices fall below the agreed "strike" price, the city pays the difference to the supplier. If market prices exceed it, the supplier pays back to the city. This price risk-sharing mechanism reduces uncertainty for clean energy projects and unlocks private investment (CCFLA, FSR).

 

Why It Matters for Cities

  • Mitigates price volatility for clean energy developers
  • Mobilizes private capital into climate-aligned infrastructure
  • Enables cities to support new energy markets without large capital outlays
  • Encourages reduction of emissions through stable pricing signals

 

Key Features

  • Long-term duration, typically 10–20 years
  • Based on a pre-agreed strike price for delivered output
  • Bilateral contracts or competitive auction frameworks
  • Payments flow from whichever party—city or developer—who is out of the money

 

How It Works

  • City defines strike price tied to clean energy output or carbon intensity
  • Developers deliver energy or service under that contract
  • City pays shortfall if market price is lower; developer pays excess if price is higher
  • Revenue certainty enables project financing by private parties

 

Benefits & Challenges for Cities

Benefits:

  • Attracts private investment without upfront capital requirement
  • Reduces fiscal exposure while supporting decarbonization goals
  • Encourages predictable, long-term infrastructure planning

Challenges:

  • Accuracy in setting strike price is crucial
  • Long-term fiscal obligations may constrain budgets
  • Regulatory or political support may be needed for implementation

 

Use Cases

CPPA as a CFD-Style Revenue Guarantee in Zonnepark Aadijk II (Almelo, Netherlands)

In Overijssel, the Netherlands, the Zonnepark Aadijk II solar park provides a compelling real-world example of a Contract for Difference (CFD)-style mechanism, implemented through a Corporate Power Purchase Agreement (CPPA) that ensures purchase of generated renewable power at a fixed price. The Energiefonds Overijssel, a regional energy fund, triggered construction of a large ground-mounted solar park—spanning 62 hectares with 47 hectares of PV panels (approximately 70,000 units)—by issuing a €20 million loan supported by a 10-year CPPA with Allego, a Dutch charging-point manager (StartGreen Capital, 2023). This CPPA guarantees the purchase of the solar-generated electricity at an agreed-upon price, akin to a CFD structure: if market prices drop below the agreed rate, Allego covers the difference; if prices rise, the distribution of upside may be negotiated contractually.

The project scale is substantial: generating 43,000 MWh of clean energy annually—enough to supply over 17,000 households—and contributing significantly toward the province’s 2050 energy neutrality goals. The implementation process involved structuring financing around a long-term offtake agreement that de-risks construction and revenue flows, enabling banks to lend on favorable terms. One challenge was ensuring the offtaker’s long-term creditworthiness and aligning contract terms with solar generation profiles and market volatility. Nonetheless, the achievements speak to its success: the CPPA provided revenue certainty, catalyzed the region’s largest solar project to date, and facilitated synergy with electric vehicle infrastructure via Allego’s charging network. Lessons learned include the power of combining debt financing with PPAs as revenue support tools, the importance of selecting a credible buyer (Allego), and the value of regional investment funds in scaling renewable infrastructure through PPA-driven models.

 

When to Use It

  • Best suited for Planning and early operation
  • It can be used in Renewable energy, district heating, industrial decarbonization

 

Reference Links

 

Back to Finance Resource

Comments ()

Authors

Jayashiree Elango Project Manager - FS

Last update: February 25, 2026

Tags

FinanceFunding
Under license CC BY
This license allows reusers to distribute, remix, adapt, and build upon the material in any medium or format, so long as attribution is given to the creator. The license allows for commercial use.