The decision paves the way for sweeping reform of the country's electricity market, including renewables. The Commission also approved initial CfDs for five offshore wind farms - worth around £9.7bn.

European Commission Vice-President in charge of competition policy Joaquín Almunia said, "the UK Contracts for Difference encourage all renewable energy technologies producing electricity to compete against each other for support beyond 2016. It is a fine example of how to promote the decarbonisation of the economy with market-based support mechanisms, at the lowest possible cost for consumers".

However some in the UK renewable energy industry worry about the potential for CfDs to exclude smaller participants to the benefit of large incumbent players. Concerns persist that DECC is not taking sufficient care to safeguard smaller players and new entrants into the renewable power market. UK Renewable Energy Association Head of Policy Paul Thompson said “it is vital that the most cost-effective sectors – biomass, solar, onshore wind and established waste to energy technologies – are given sufficient budget to minimise short-term costs for consumers. While at the same time, CfDs must also foster those early stage technologies – geothermal, wave and tidal and advanced waste conversion – that will come down in cost as they mature, delivering low carbon energy security long into the future.”

The scheme will run for 10 years starting in April 2015, with a budget of GBP 15 billion (around € 19 billion). Selected individual projects will be able to receive support for up to 15 years.

  • 'Established’ technologies (such as onshore wind, solar photovoltaic, energy from waste with combined heat and power, small hydropower, landfill gas and sewage gas) will compete against each other for support in a common auction;
  • ‘Less established’, new and innovative technologies (such as offshore wind, wave, tidal stream, anaerobic digestion or geothermal energy) will initially benefit from allocated budgets in order to promote their further development but will also be subject to competitive auctions with some degree of cross-technology competition.
  • Biomass conversion plants will be supported through dedicated tenders up to 2017. After that, the UK will evaluate whether biomass can be included in the common tenders for established technologies.

Aid granted under the scheme will be paid out as a variable premium on top of a reference electricity (wholesale) price, and up to a pre-defined strike price, based on a so-called "Contract for Difference" (CfD). Generators will earn money from selling their electricity into the market as usual. When the average wholesale price of electricity is below the strike price, generators will receive a top-up payment. In case of high wholesale electricity prices, revenues for the generator will be capped at the strike price to ensure that there is no overcompensation. In addition, as of 2016 no support will be paid in case of periods of negative prices longer than six hours.

The payments will be financed through a tax imposed on energy suppliers. To ensure that the tax does not discriminate overseas generators, imported renewable electricity will not be subject to the tax. In the long run overseas generators will be allowed to compete for CfDs on the same terms as national generators.

The Commission assessed the scheme under its new rules on state aid for environmental protection and energy. The scheme is in line with the objective to promote renewable energy while avoiding overcompensation and without unduly distorting the internal energy market, given in particular the competitive and non-discriminatory procedures to allocate the aid.

Background to CfD

The CfD scheme aims to contribute to the UK decarbonisation objectives and to maintain a secure energy supply in view of the projected increases in energy demand and the upcoming closure of a significant share of the current UK generation capacity.

It will co-exist until 2017 with the current support system based on certificates (the renewable obligation system), which it will replace afterwards. Generators will be able to choose between them, and will receive support under only one of the support schemes.

The CfD scheme is part of the comprehensive UK Electricity Market Reform.