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

Schlecht, Ingmar; Maurer, Christoph; Hirth, Lion

doi:10.1016/j.enpol.2024.113981

Please use this identifier to cite or link to this item: https://doi.org/10.21256/zhaw-29984

Publication type:	Article in scientific journal
Type of review:	Peer review (publication)
Title:	Financial contracts for differences : the problems with conventional CfDs in electricity markets and how forward contracts can help solve them
Authors:	Schlecht, Ingmar Maurer, Christoph Hirth, Lion
et. al:	No
DOI:	10.1016/j.enpol.2024.113981 10.21256/zhaw-29984
Published in:	Energy Policy
Volume(Issue):	186
Issue:	113981
Issue Date:	13-Jan-2024
Publisher / Ed. Institution:	Elsevier
ISSN:	0301-4215 1873-6777
Language:	English
Subjects:	Contracts for differences; Electricity market; Renewables; Nuclear power; Investment financing; Support scheme
Subject (DDC):	333.79: Energy
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.
URI:	https://digitalcollection.zhaw.ch/handle/11475/29984
Fulltext version:	Published version
License (according to publishing contract):	CC BY 4.0: Attribution 4.0 International
Departement:	School of Management and Law
Organisational Unit:	Center for Energy and Environment (CEE)
Appears in collections:	Publikationen School of Management and Law

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Schlecht, I., Maurer, C., & Hirth, L. (2024). Financial contracts for differences : the problems with conventional CfDs in electricity markets and how forward contracts can help solve them. Energy Policy, 186(113981). https://doi.org/10.1016/j.enpol.2024.113981

Schlecht, I., Maurer, C. and Hirth, L. (2024) ‘Financial contracts for differences : the problems with conventional CfDs in electricity markets and how forward contracts can help solve them’, Energy Policy, 186(113981). Available at: https://doi.org/10.1016/j.enpol.2024.113981.

I. Schlecht, C. Maurer, and L. Hirth, “Financial contracts for differences : the problems with conventional CfDs in electricity markets and how forward contracts can help solve them,” Energy Policy, vol. 186, no. 113981, Jan. 2024, doi: 10.1016/j.enpol.2024.113981.

SCHLECHT, Ingmar, Christoph MAURER und Lion HIRTH, 2024. Financial contracts for differences : the problems with conventional CfDs in electricity markets and how forward contracts can help solve them. Energy Policy. 13 Januar 2024. Bd. 186, Nr. 113981. DOI 10.1016/j.enpol.2024.113981

Schlecht, Ingmar, Christoph Maurer, and Lion Hirth. 2024. “Financial Contracts for Differences : The Problems with Conventional CfDs in Electricity Markets and How Forward Contracts Can Help Solve Them.” Energy Policy 186 (113981). https://doi.org/10.1016/j.enpol.2024.113981.

Schlecht, Ingmar, et al. “Financial Contracts for Differences : The Problems with Conventional CfDs in Electricity Markets and How Forward Contracts Can Help Solve Them.” Energy Policy, vol. 186, no. 113981, Jan. 2024, https://doi.org/10.1016/j.enpol.2024.113981.